Sometimes, when businesses get in financial trouble, they are tempted to pay creditors or others instead of paying the government the income and employment taxes it has withheld from employees’ wages.
This is a big mistake and can lead to large penalties against business owners or others who are responsible for paying over such taxes. In such situations, the IRS can levy on the individual assets of the responsible person.
To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for a trust fund recovery penalty (TFRP). Income and employment taxes are called trust fund taxes because you actually hold the employee’s money in trust until you make a federal tax deposit in that amount. The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business.
The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on the Unpaid Income Taxes Withheld, plus the employee’s portion of the withheld FICA taxes. For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.
The trust fund recovery penalty (TFRP) may be assessed against any person who is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and willfully fails to collect or pay them.
For purposes of the trust fund recovery penalty (TFRP), a responsible person includes, but is not limited to an officer or employee of a corporation, a partner or employee of a partnership, a member or employee of an LLC, a corporate director or shareholder, another corporation, or a surety or lender.
The IRS does not need to use the trust fund recovery penalty (TFRP) to assert liability against the owner of a sole proprietorship, because the individual owner is already personally liable for trust fund taxes. However, the IRS can use the trust fund recovery penalty (TFRP) to assert liability against an employee or other non-owner who exercises control over a sole proprietorship’s finances.
Regardless of a person’s corporate title, a person will not be held liable for the trust fund recovery penalty (TFRP) unless he or she is considered a “responsible person” (i.e., an individual who has the duty to account for, collect, and pay over the trust fund taxes to the government). There may be more than one responsible person in a business.
Most trust fund recovery cases involve corporate officers. A director who is not an officer or employee of the corporation may be responsible for the trust fund recovery penalty if he or she was responsible for the corporation’s failure to pay taxes that were due and owing.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.