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”.
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 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 people and determined that there is willfulness, the Trust Fund Recovery Penalty can be applied to all of them. The penalty amount is equal to income taxes and FICA tax withheld from employees’ paychecks but does not include employer payroll taxes.
RESOLUTION TO A PROPOSED ANALYSIS OF THE TRUST FUND RECOVERY PENALTY
You have 60 days to appeal any decision by the IRS if the Trust Fund Recovery Penalty is proposed to be assessed. The IRS may take collective action against your property once the penalty has been assessed. The IRS is very serious about employment taxes. The IRS can often propose imposing a penalty on all employees of a company in an effort to collect. It is best to consult an experienced attorney if you are having difficulty paying your payroll taxes. Our lawyers have successfully represented taxpayers against the wrongful assessment and payment of the Trust Fund Recovery Penalty. Our attorneys have helped business owners to get on their feet again and negotiated payment arrangements for those who were properly assessed the penalty.
Remember that payroll taxes are held in trust and the government can take swift and severe action if they are not paid. To avoid such situations, it is best to resolve any payroll tax issues quickly.
This article was written by Alla Tenina. Alla is one of the best IRS Tax attorneys in Los Angeles California, and the founder of Tenina law. She has experience in bankruptcies, real estate planning, and complex tax matters. The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; the ABA and its members do not recommend or endorse the contents of the third-party sites.