When a business has employees, the employer is responsible for withholding employees' Medicare and Social Security contributions from their checks. In many cases, a business will also withhold some federal and state income taxes. These withheld amounts are called trust fund taxes, and businesses must send those to the U.S. Internal Revenue Service (IRS). If a business fails to pay these amounts to the IRS, the IRS can charge a penalty known as the Trust Fund Recovery Penalty (TFRP).
Who Is Responsible?
The IRS takes failure to pay trust fund taxes very seriously. If a business withholds these amounts from employees and fails to pay them to the IRS, the IRS may hold anyone responsible for paying these amounts personally liable. That can include owners, CEOs, and other corporate officers and directors, but also employees responsible for payroll, third party payroll administrators, bookkeepers, and outside accountants. The IRS will hold anyone responsible for withholding taxes or anyone who knows they aren't being paid and go after their personal assets to pay the penalty.
To establish legal liability, the IRS must show:
- The person is responsible for collecting or paying the withheld amounts and employment taxes, or for paying collected excise taxes; and
- The individual willfully failed to collect or pay them.
To be willful, the responsible person:
- Must have been, or should have been, aware of the outstanding taxes and
- Intentionally disregarded the law or was willfully indifferent to it.
If the responsible person uses outstanding taxes to pay other creditors, that is evidence of willfulness.
What are the Penalties?
The Trust Fund Recovery Penalties are not a small slap on the wrist. Instead, the TFRP will be equal to the amount of the taxes withheld and not paid. This amount includes any income tax withheld, as well as Medicare and Social Security withholding. Over some time and several employees, this can be a significant amount.
Defenses to a Trust Fund Recovery Case
There are few defenses to a TFRP case. The IRS will hold someone within the business responsible.
- The individual isn't responsible: The primary defense against a TFRP case is that the person in question wasn't responsible for collection or payment or that the failure to pay wasn't willful or intentional.
- Statute of limitations: The IRS must assess the TFRP within three years after the business files a form 941 or 944. After three years, the IRS can't assess a personal penalty against individuals. However, if the business never filed a form, the IRS can assess the penalty at any time.
An Experienced Tax Attorney Can Help
If the IRS suspects that a business is not paying trust fund taxes, it will start an assessment to determine the responsible party. The IRS will request documents and information from the company, including bank statements and canceled checks. The IRS will also ask who pays the bills, controls the money, and has access to the business bank accounts or PINs.
If the IRS has contacted you about an assessment or if you have a business with outstanding tax liabilities, you need the help of an experienced tax attorney immediately. Gabaie & Associates, LLC, represents clients in tax matters nationwide before the IRS and state tax agencies. Call us at 443-345-8291 or contact us online for a free consultation.