The IRS requires businesses to withhold a certain amount of funds from employee paychecks every pay period. These funds, which include social security and Medicare contributions, are to be held in “Trust” by the employer until paid in full to the IRS.  When a business fails to pay these Payroll withholding taxes held in trust to the IRS… the IRS will look to determine who was responsible for the payroll tax deposits, and these individuals may be targeted and held accountable through what is known as the trust fund recovery penalty.  Read on to learn more about how the TFRP is determined and how the penalty can be managed.

Two Key Determining Factors For The Trust Fund Recovery Penalty

When determining if and how to administer this penalty, the IRS must consider two key factors.

1. The first is who is responsible for failing to pay the payroll deposits.
2. The second factor to consider is if this failure to pay was Willful.

Who Is Responsible?

The first step of the IRS investigation will be to determine who is responsible for the failure to pay. While in some instances, the responsible party could be the CEO, owner, or director of the business, a person’s title does not always indicate their responsibility.  Anyone from bookkeepers to board members and even outside accountants could be liable for penalty if they are found to have willfully failed to collect and pay these employee taxes.

Investigators may request a variety of information, from bank statements, cancelled checks, bank signature cards, and articles of incorporation.  Often, the IRS is quick to target any persons who had check signing authority, and signed company checks. The IRS will determine if they are in the position to make a decision about payment before assigning responsibility.  The IRS may also look to assess the TFRP to anyone in the company that knew the taxes weren’t being paid (again willful…).

Was It Willful?

Next, the IRS must show that the person or persons responsible made a willful decision to not make the required payroll deposits.  Rather than simply forgetting to pay the IRS or missing a payment deadline, a willful failure to pay means that a person knows taxes are due and intentionally disregards the law. In addition, other responsible parties that know the law is being disregarded and do nothing to correct the matter may also be considered willfully responsible.

How The TFRP Is Managed

Responsible parties will need to personally pay back the entirety of the TFRP assessed in addition to interest.  If the taxpayer is not able to full pay the assessed TFRP…. Installment Agreements, and/or Offer In Compromise options may be available.

An Overview of The Trust Fund Recovery Penalty

When a business willfully fails to remit the payroll deposits (monies withheld from its employees paycheck), the IRS will assess a trust fund recovery penalty. This TFRP assessment will be assessed to any individual that the IRS determines to be willfully responsible for not remitting the payroll tax deposits or had knowledge that the taxes were not going to be paid.  Responsible parties will need to personally pay the TFRP debt owed to the IRS plus interest.

Have a question? Contact David Yarborough, Tax Resolution Services.