Collection and payment of employment taxes to the U.S. Treasury funds programs like Social Security, Medicare, and federal unemployment. Failure to withhold and turn over payroll taxes can lead to a penalty against those responsible, which can be the business owner, partners, or corporate officers.
Whether through employment tax fraud or outright theft, if a business falls into arrears on its reporting and pay over of employment taxes, the IRS will eventually be in touch. The Trust Fund Recovery Penalty (TFRP) is a penalty charged against those with corporate responsibility for collecting payroll taxes and turning them over to the IRS. The TFRP is a severe measure intended to hold individuals accountable and recover taxes rightly due to the government.
If the IRS suspects you are in arrears on payroll taxes, you may be notified of an audit or IRS tax investigation. It is easy for business owners to fall behind on bills and start “borrowing” from payroll taxes to stay afloat. Or—just as often—business owners feel entitled to skim employment taxes to enhance their lifestyle. Either way, when the IRS asks where the money is—someone must pay up. This is where the TFRP comes in. The company and its owner(s) can be assessed the penalty while remaining an ongoing concern.
Consider these points about the TFRP:
- If an investigation points to embezzlement of employment taxes, the IRS will determine who was responsible for the collection of payroll taxes. If the accountant was unscrupulous and stole funds for personal use—the business owner will share in the payback and penalty. The responsibility cannot be discharged by assignment.
- To assess a TFRP, the IRS must find the failure to pay employment withholding was willful. This could be the owner who is making use of employment taxes to pay their own bills—or it could be the employee who was supposed to be collecting the funds who had knowledge that payroll taxes were being skimmed to keep the lights on. There are three criteria of willfulness when it comes to the TFRP. They are a direct choice to embezzle money or pay other creditors instead of the U.S. government, knowledge that taxes are not being paid, and disregard for the responsibility to investigate and correct the situation.
- The TRFP is equal to the amount of taxes that should have been withheld and paid over, plus the same amount in the form of a monetary penalty. The IRS demonstrates a ready willingness to prosecute those who engage in employment tax fraud.
Options for business owners facing a TFRP are to challenge the charge, challenge the assessment of who is responsible, or arrange for and pay the fine. If you know your employment taxes are not being paid, speak with an experienced criminal tax attorney before the IRS speaks to you.
Questions about a potential tax crime allegation? Talk to our legal group for experienced, discreet guidance and representation
With offices in Cleveland and Chicago, the legal group at Robert J. Fedor, Esq., LLC delivers skilled representation on IRS audits, employment tax fraud, and other tax controversies. Call 440-250-9709 or contact us online today.
