Tax Tip: Trust Fund Recovery Penalty
Generally, a person is responsible for paying his or her own taxes directly to the Internal Revenue Service. However, sometimes the law requires one party to collect and pay tax on behalf of a taxpayer, such as an employer’s obligation to collect payroll taxes (“trust fund taxes”) on behalf of its employees. These taxes include income, social security and Medicare taxes, which are withheld from an employee’s paycheck, as well as excise taxes. Whether the employer pays the taxes directly or uses a third party payroll service, these taxes must be paid directly to the IRS on behalf of the employees.
When the trust fund taxes are not collected and paid, or are collected but not paid, the IRS may assess a Trust Fund Recovery Penalty (“TFRP”) against any person who is responsible for collecting or paying withheld taxes and willfully fails to collect and / or pay them. Unlike most penalties, the TFRP allows the IRS to collect unpaid taxes from a person other than the taxpayer. In this case, the corporation would be the taxpayer but the IRS could go after the individuals. This is different than income tax where the IRS can generally only collect from the corporation. The level of responsibility depends upon whether the responsible person exercised independent judgment over the employer’s financial affairs; however, in practice that definition is read much more broad. No bad motive is required for the TRFP to be assessed. Liability extends to any person with authority or control of taxes collected who was or should have been aware of the taxes due, and either intentionally disregarded or was “plainly indifferent” to the law requiring payment. This can include officers, employees, shareholders, members and / or directors of a corporation.
Because the TRFP imposes personal liability against a responsible party, the IRS is authorized to take collection action against that party’s personal assets. This action includes filing a federal tax lien, levying bank accounts, and seizing assets. In order to avoid the TFRP, employment taxes must be collected, accounted for, and paid when required. If the TFRP has been assessed against you or if you need assistance complying with your trust fund tax obligations, contact Hone Maxwell LLP today.