Trust Fund Recovery Penalty

Payroll taxes can be quite different from income taxes because they are trust fund taxes. The government holds the portion of payroll taxes withheld by employees until a federal tax deposit has been made. These funds are held in trust so failure to file payroll tax returns or pay tax on time can lead to a penalty against the owner of the business–the Trust Fund Recovery Penalty.

One or more individuals can be subject to the Trust Fund Recovery Penalty if they willfully fail or refuse to pay the trust fund portion payroll taxes. The penalty can only be assessed if the individual is a “responsible” person and acted “willfully”.

RESPONSIBLE PERSON

The IRS will investigate businesses that are late on their payroll taxes and assess the Trust Fund Recovery Penalty to anyone deemed responsible. This can include any person who has the responsibility to withhold, pay, and account for payroll taxes to the IRS. These are some examples of responsible persons:

  • Officer of a corporate partner of a partnership
  • Member of an LLC
  • Sole proprietor
  • An employee
  • Provider of payroll service
  • Any other person who has authority or control over the funds

WILLFULNESS

Willfulness can only exist if the responsible person knew, or should know, about the unpaid taxes and was either indifferent or disregarding the payment. Common examples of willfulness include the use of funds that were intended for payroll taxes to pay other creditors, instead of the government. After the IRS has established the responsible person or … Read More