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.
The post What Is the Trust Fund Recovery Penalty (TFRP) & How Can You Settle It? appeared first on Paladini Law.