Business owners: beware the Trust Fund Recovery Penalty for payroll taxes

Basic_1040We've previously discussed some of the red flag actions, or inactions, that are likely to get the IRS's attention. For small business owners, tax obligations are not only financially burdensome, but also confusing leading some to make costly tax mistakes.

In addition to the numerous tax obligations associated with owning and running a business, regardless of whether a business has five or 50,000 employees, all business owners are required to pay payroll taxes. Payroll taxes are taxes an employer must pay per employee and which are used to finance federal trust fund programs like Social Security, Medicare and unemployment.

In cases where a business errs and fails to pay a portion or all of their payroll taxes, it's almost a guarantee that the IRS will come knocking and when they do, the penalties can be quite punitive. Not only will the IRS impose tax penalties and fines against a business owner, but the agency may also take action against any principles, officers and even other employees who have check signing authority.

By imposing what's referred to as a Trust Fund Recovery Penalty, the IRS seeks to penalize business owners and any other individuals affiliated with a business that it deems as being responsible persons. The amount of a TFRP is equivalent to 100 percent the amount of unpaid payroll taxes. Therefore, if a business owner failed to pay $50,000 in payroll taxes, he or she, and other responsible persons, are responsible for paying the original $50,000 payroll tax amount along with a TFRP of $50,000.

If those deemed responsible for the assessment and original payroll tax amount fail to file an appeal or provide the IRS payment within 60 days of receiving notice, the IRS may take action to impose tax liens or seize assets.

In some cases, the IRS may even choose to pursue legal action against individuals deemed responsible for the payment of delinquent payroll taxes and assessments. It's wise, therefore that business owners dealing with payroll tax issues contact an attorney who handles criminal IRS matters.

Source:, "Employment Taxes and the Trust Fund Recovery Penalty (TFRP)," Jan. 15, 2014