Trust Fund Recovery Penalty – What is it?

When a business is in a difficult financial situation, a decision may be made to temporarily not pay payroll taxes.   What may not be known is when the payroll taxes are left unpaid, the IRS can make individuals in the business personally responsible for the payroll taxes.  This is called Trust Fund Recovery Penalty.Deciding not to pay payroll taxes is easy to do but this decision has significant consequences.  If a business is struggling to stay open, the first bills to pay are the most pressing bills.  It is like the loudest person in the room gets the most attention.  The loudest person may represent inventory, rent, utilities, mortgage, suppliers or lenders.  The quietest person in the room is the IRS.  The IRS is sitting in the corner not saying a word.  Then out of nowhere the IRS strikes with interest, penalties, liens and bank levies/garnishments.   It is easy to not pay the IRS.  All you have to do is file a return without a check.  Even better is not filing the return at all.  The problem is the IRS may not catch up with the business for months or even years.  By the time the business receives the bill, the tax plus interest and penalties is astronomical to say the very least.  At this point, the business barely has enough money to pay the tax.  The owner doesn’t even want to think about the penalties and interest because these amounts seem ridicules.  When the business does not make arrangements to timely pay the payroll taxes, the IRS will pursue Trust Fund Recover Penalty.

What is Trust Fund Recovery Penalty? 
It is the employee’s portion of withholdings, social security, and medicare taxes.  These amounts are in trusted to the business to pay to the government on the employees behalf.  When the business fails to pay the payroll taxes, the IRS will hold certain individuals in the business personally liable for the trust fund portion.  The trust fund portion represents about 70% of the payroll taxes owed.

The IRS will generally hold owners of the business liable for trust fund recovery penalties.  The IRS can also hold other employees in the business such as secretaries, accountants, and bookkeepers.

By definition of Code Sec. 6672(a), Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for an pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal  to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

Responsible Person
A “responsible person” is defined in Code Sec. 6671(b), the term “person”, includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.

I will discuss more about how the IRS determines “persons responsible” for trust fund penalties in a future blog.

If you have unpaid payroll taxes and need help, call ALG Tax Solutions 855-MI-Tax-Help (855-648-2943) or provide your contact information online.  We can help you resolve payroll tax problems with creative solutions.

IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.