Trust Fund Recovery Penalty: Employment Taxes Enforceable Against Owners and Officers Personally

One of the most important, but often overlooked, aspects of running a business is paying payroll taxes. As most of you know, employers withhold federal income taxes, social security, and Medicare taxes from their employees’ paychecks and these taxes need to be remitted to the IRS. The taxes withheld from employees’ paychecks are known as Trust Fund taxes, because the employer holds the taxes in trust for the IRS. However, when the employer does not make these payroll tax deposits to the IRS, the business and the individual officers can get into tax trouble. The IRS is especially serious about this tax because they view it different from income taxes.  With income taxes, the issue is between the taxpayer and the IRS.  With Trust Fund Taxes, the IRS views it as “stealing” because the employer has kept money from its employees and not remitted it to the IRS on their behalf.

The IRS has the authority to not only hold the business accountable for the unpaid payroll taxes but can also assess the same unpaid payroll taxes against any individual deemed responsible for not making the payroll tax deposits. These individuals are often owners and officers within the company who made the decision of paying other expenses rather than remitting the payroll taxes to the IRS. Therefore, when considering cash flow to keep the business open, payroll taxes need to be a top priority. Prior to assessment, the IRS will conduct an investigation to determine the individual(s) who is responsible for paying the taxes in order to assess that individual with the Trust Fund Recovery Penalty (TFRP). The IRS does this to ensure another avenue in collecting the payroll taxes if the business ever goes under and closes its doors.

Once an individual is assessed the TFRP, the IRS can collect the outstanding payroll taxes from personal assets, including bank accounts, property, and other valuables. The severity of this penalty underscores the gravity of noncompliance with trust fund tax obligations. Furthermore, this assessment isn’t exclusive to the IRS; similar principles apply in select states through agencies like the EDD in California. The TFRP can be avoided by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required. It is imperative that an employer make its tax deposits on time.

As businesses navigate the realm of taxation, a comprehensive understanding of trust fund taxes becomes paramount in protecting both corporate and personal financial futures. If you have any questions or have fallen behind on your employment taxes, do not hesitate to contact our tax attorneys at Hone Maxwell LLP.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

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