Employers and Business Owners—What is a Trust Fund Recovery Penalty?

Virtually all businesses collect payroll taxes, known as trust fund taxes, and deposit them with the Internal Revenue Service (IRS). When employer payroll taxes are not reported and paid over, the IRS may pursue a trust fund recovery penalty (TFRP). Given the potential exposure to business owners, it is a good idea to understand the TFRP.

The TFRP is intended to encourage business owners and responsible parties to collect employment taxes in a timely and accurate way. Payroll taxes are paid to the U.S. Treasury and fund unemployment, Medicare, Social Security, and other programs.

Features of the TFRP

The TFRP is intended to deter issues with the timely payment and accounting of payroll tax payments. Consider the following:

• The TFRP can be assessed against those who are responsible for the payment of trust fund taxes.  This could be the owner of a small business, or a C-suite executive or director. If a business outsources its payroll functions to a vendor, that third-party payor may be liable, along with the owner or other party who carries the original responsibility for payment of the wage taxes.
• The cost of a TFRP is high. The penalty is based on the total of the unpaid payroll taxes due and not paid over to the IRS. The IRS also charges interest on the trust funds due.
• Although your company or business may have failed to pay over payroll taxes, an important deterrent built into the TFRP is the fact that the IRS can personally collect from the individuals responsible for paying over wage taxes. Or as the IRS bluntly puts it, “if we charge you this penalty, we may take your assets (except exempt assets) to collect the amount owed.”

Reaching an Agreement: Possible When the IRS Recognizes an Honest Mistake

Sometimes the IRS and business owners can come to an agreement regarding payroll tax problems. That possibility diminishes if the IRS believes a responsible party willfully diverted employment taxes or otherwise disregarded a responsibility of which they were aware.

The IRS may interview the individuals responsible for paying the wage taxes. The interview might offer the IRS insight into who specifically failed to pay the taxes or if they were willfully withheld by a responsible party, such as a business owner, who may have used the payroll taxes to bankroll lifestyle improvements.

Addressing Payroll Tax Arrears? Act Now with Expert Legal Counsel

Either way? If you are in arrears to the IRS for payroll taxes, it is a good idea to get ahead of it by seeking experienced legal counsel on options and strategies before the IRS comes calling. Reach out to us at 440-250-9709 or schedule a consultation. We serve both domestic and international clients, with offices in Cleveland and Chicago.

For comprehensive insights into managing your employment tax responsibilities, download our eBook, What Every Business Owner Needs to Know about Employment Tax Fraud. This guide is essential for any business owner looking to navigate the complexities of tax compliance effectively.