Trust fund tax is money that you legally withhold from an employee’s paycheck and hold “in trust” until it’s time to pay the funds to the Treasury via the Federal Tax Deposit system. This withholding enables your employees to make contributions to their income taxes and retirement benefits (Social Security and Medicare).
Any employer who intentionally neglects this obligation can incur a Trust Fund Recovery Penalty (TFRP) from the government. It is presently one of the largest penalties imposed by the IRS, which will go as far as to seize personal assets to recoup the money.
Who is Responsible for a Trust Fund Recovery Penalty?
The IRS levies the TFRP on those who intentionally failed to collect trust fund taxes from employee wages and remit them. Depending on the company, this could be:
- The owner(s)
- CEOs and Directors
- Company shareholders
- Board of trustees (for nonprofits)
- Key employees
- Outside parties such as bookkeepers, accountants, and payroll administrators
When assigning liability, the IRS will examine company bank statements, canceled checks, bank card PINs, and online account passwords to identify who pays the bills and controls disbursements. For these parties to be held liable, the IRS needs to prove that:
- They knew about the outstanding taxes due and intentionally failed or refused to disperse the funds to the IRS OR
- They should have known about the overdue taxes but were simply indifferent to their tax obligations
The IRS does not have to establish that the company representatives acted maliciously. As long as they knew or should have known about the outstanding taxes and did not take appropriate measures, their actions are considered willful.
How Much is the Trust Fund Recovery Penalty?
The penalty amount will equal the amount of tax that should have been paid under the FICA or Federal Insurance Contribution Act. For example, if a single paycheck should have had $353 withheld for income tax, Social Security, and Medicare, this is the amount of the TFRP.
What Happens if the IRS Accesses a TFRP?
The process begins with the IRS sending you a notice of its intent to impose the penalty. If you disagree with its decision, you have 60 days to appeal. If you fail to act, the agency will send you a Notice and Demand for Payment. By this point, it has the authority to impose levies and tax liens to collect the amount owing.
How Can You Settle a TFRP?
The sooner you contact the IRS to arrange an agreement, the better your chances of having your wages garnished and assets seized. Filing for bankruptcy will not discharge this type of tax debt: you must make arrangements to pay.
If you cannot immediately settle the penalty amount in full, it is possible to reach a payment agreement with the IRS. These options are:
- Installment plan. A repayment plan is set up for both the business and the responsible party, such as the owner or CEO. Once the balance is paid off after multiple installment payments, the debt is satisfied.
- Offer in Compromise. With an Offer in Compromise, the IRS and the taxpayer agree to settle the tax debt for a lesser amount, which is generally derived from a calculation that assesses what the taxpayer can pay after their necessary expenses are met.
- Currently Non-Collectible (CNC) Status. If you can’t pay the tax debt and meet your necessary expenses, you can apply for CNC status. The IRS will temporarily pause collection actions until you can pay, but any tax refunds will be garnished, and the agency can still file a Notice of Federal Tax Lien.
Contact a Trusted Trust Fund Tax Attorney Today
If you have received notice of an imminent Trust Fund Recovery Penalty, it is important to act quickly and hire an experienced tax law attorney who understands the TFRP process and can guide you toward a more positive outcome. At Paladini Law, we will help you mitigate the consequences of not paying trust fund taxes by negotiating a fair Offer in Compromise or repayment plan. For more information, please contact us today.