A Trust Fund Recovery Penalty is used by the Internal Revenue Service (IRS) to ensure the timely and appropriate payment of employment taxes.
The withholding and payment of employment taxes is a routine business operation. Anyone who has received a paycheck knows employers are required to turn over part of your pay to the IRS in the form of Social Security, federal income, and Medicare taxes. When they see the deduction on their pay stub, workers know their employer is depositing their taxes with the IRS. This keeps employees straight with the IRS and makes contributions to future Social Security and other benefits when needed.
To make all this happen, the employer must collect and turn the taxes over to the IRS. We have discussed employment tax disputes before. These problems arise when a business owner or employee with bookkeeping or financial control withholds taxes from workers, but does not pay the money over to the IRS.
There are a number of reasons individuals fail to turn over funds to the IRS. A struggling business owner may use employment taxes to pay creditors to keep the business afloat, fully intending to pay back the money. Other business owners see the withholding fund as a means to pay personal expenses or boost their quality of life. Regardless of the reason that withheld money is not paid over to the IRS, it is illegal. When the IRS gets wind of it, a Trust Fund Recovery Penalty (TFRP) comes into play.
The TFRP as an enforcement tool
The TFRP is basically intended to deter responsible individuals from failing to carry out their duty to collect and pay employment taxes over to the IRS. A TFRP is a serious threat because it can be enforced against an individual, whereas many employment-related actions are usually protected by the corporate veil.
Here are TFRP basics:
- The amount of the TFRP is the amount of the income taxes that were not paid. It also includes the employees share of unpaid FICA taxes. Thus, the TFRP makes an individual responsible for the amount that the company did not pay over to the IRS, plus their own tax obligation.
- The IRS process for collecting the TFRP includes identifying the individual responsible for collecting and paying over the taxes and who willfully fails to do so.
- The individual responsible for paying the taxes can see their personal assets seized to pay the obligation.
The TFRP is an effective tool used against individuals who are responsible for paying over employment taxes to the IRS. If you are a business owner or controller aware of irregularities in your payroll tax payments, speak with an experienced tax attorney sooner than later.
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Located in Cleveland and Chicago, the tax lawyers at Robert J. Fedor, Esq., LLC respond to your concerns about payroll tax issues, foreign bank accounts, or other tax controversy. When you need skilled tax advice locally or abroad, call 800-579-0997 or contact us.