9. APPLICATION OF PAYMENTS

§ 5:50 In General

I.R.C. § 7501 states that withheld taxes “shall be held to be a special trust fund interest for the United States.” The purpose of the Trust Fund Recovery Penalty provision is to collect from individuals only unpaid funds held in trust by the employer. Therefore, a practitioner must know how the Trust Fund Recovery Penalty is computed.

§ 5:51 Amount Of Penalty

The amount of the penalty is the amount of the trust fund. The trust fund is comprised of only the withheld taxes, i.e., withheld income tax and the employee’s share of Social Security tax. The trust fund does not include the employer’s matching share of the Social Security tax because those funds are not withheld from the employee’s wages. The employer’s share of social security taxes, and all penalties and interest, are corporate obligations that do not pass through as a personal liability to the individual. They are not required to be held in trust for the government and, therefore, should not be included in the amount of the Trust Fund Recovery Penalty. The author has found that the Service consistently miscalculates the trust fund portion, therefore, the practitioner must always verify the calculation of a proposed Trust Fund Recovery Penalty. See the “Computation Sheet” that is used by the Internal Revenue Service to compute trust fund portion.