Managing payroll taxes is a crucial responsibility for business owners. A key area of concern arises when payroll tax deposits are not made, as this can lead to the Trust Fund Penalty, also known as the Trust Fund Recovery Penalty (TFRP), which can have significant financial implications.
The TFRP is a penalty imposed by the Internal Revenue Service (IRS) on individuals responsible for remitting payroll taxes who willfully fail to collect, account for, and pay over such taxes. These payroll taxes include federal income tax, Social Security, and Medicare taxes withheld from employees’ wages. The penalty is equal to 100% of the unpaid trust fund taxes. Please keep in mind that although the TFRP is referred to as a penalty, it is not in addition to the tax.
Join us as we discuss ten commonly asked questions about the TFRP that will give you a better understanding of this penalty, its consequences, and how to deal with it.
Who Can Be Assessed the Trust Fund Penalty?
The IRS imposes the TFRP based on two main factors: (1) responsibility and (2) willfulness. They assess 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), including shareholders, partners or members
- Officers, directors, and employees
- Nonprofit Board of Trustee members
- Outside parties, such as bookkeepers, accountants, and payroll administrators
- Banker or other Lender
You must have willfully failed to pay the trust fund taxes to be held responsible. For example, if you own a business and manage its finances, and choose to pay suppliers instead of the trust fund taxes, you are acting willfully. However, if you are an employee whose job is solely to write checks as instructed by your employer, you are unlikely to be held responsible.
How Long Does the IRS Have to Make the TFRP Assessment?
The IRS generally has three years to assess a TFRP. This period starts on the later of April 15 following the year of the relevant quarter or the actual date the employer filed the payroll tax return. If the IRS does not assess this penalty before the statute of limitation expires, it can no longer do so. It’s important to note that this three-year period only begins if the employer has filed the payroll tax returns.
How Long Does the IRS Have to Collect the TFRP?
Once the IRS assesses a trust fund penalty against a responsible person, it has ten years to collect the debt. In most cases, after ten years, the debt becomes unenforceable. However, the taxpayer may have taken specific actions that prevent the statute from running. These actions can include filing an Offer-in-Compromise, filing a Collection Due Process Hearing request, or requesting an installment agreement. The ten-year collection statute is extended in these instances because it would be unfair to the government to have the statute run while it is prevented from taking enforced collection action.
Will Employees Receive Credit for the Taxes the Employer Failed to Remit?
The failure to pay over trust fund taxes will not harm the employees. They are given full credit for the income, social security and Medicare taxes that should have been turned over to the government.
The IRS has Imposed the TFRP on Multiple Responsible Persons. Are all Responsible Persons Required to Pay the Entire Penalty?
The TFRP may be assessed against more than one responsible person and each person is jointly and separately liable to pay the TFRP. However, the IRS is only able to collect the penalty once. For example, IRS Revenue Officer Jones assesses a TFRP of $30,000 against the three owners of a business. If two of the owners each pay $15,000, the third owner is not required to pay anything to the IRS. However, a responsible person who pays more than their proportionate share of the TFRP can go to court to exercise their right of contribution from the other responsible persons.
Can I be Criminally Charged For Not Paying Payroll Taxes?
Yes. The government has begun criminally prosecuting payroll cases more frequently. Responsible persons may be at risk of criminal prosecution when there is a substantial liability, a history of TFRP assessments, and/or continuing pyramiding of trust fund taxes. If convicted, you can be fined up to $10,000, imprisoned for up to five years, or both, and bear the costs of prosecution.
Can a Minority Shareholder Be Held Responsible for the TFRP?
Yes. You are responsible for the trust fund penalty if you meet the above-mentioned factors. Regardless of whether you are only a 5% shareholder, you are responsible for 100% of the trust fund penalty. You won’t simply be responsible for 5% of the amount owed.
Will the TFRP Survive When a Business Closes?
Yes, responsible persons are personally liable for the TFRP. So, when a business shuts down, the IRS can and will still collect from the responsible persons.
Can the TFRP be Discharged in Bankruptcy?
No, trust fund taxes are not dischargeable in bankruptcy. However, bankruptcy can provide benefits such as an automatic stay on collections or forcing the government to accept payment agreements it might otherwise not accept.
I Can’t Afford to Pay the Trust Fund Penalty. What Should I Do?
You have several options if you cannot pay the TFRP in full. These options include an installment agreement in which you make monthly payments, an offer in compromise that settles the debt for less than the full amount, or being placed in currently not collectible status, a temporary hold on collection.
Contact a Trust Fund Penalty Tax Specialist Today
If you have received a proposed assessment for the trust fund recovery penalty or have already been assessed, it is important to retain an experienced tax specialist who understands the TFRP process and can help you reach a more favorable outcome. Call East Coast Tax Consulting Group today at 561-826-9303 to discuss your payroll tax problems or other back tax issues.