Employment Tax Liabilities & Trust Fund Recovery Penalties (TFRP)
To better manage Employment Tax Liability, Congress passed a law that provides for the TFRP (Trust Fund Recovery Penalty), also called the ‘100% penalty’.
The purpose of this provision is to encourage taxpayers to promptly pay withheld income and employment taxes. The ‘employment taxes’ include social security taxes, railroad retirement taxes, or collected excise taxes.
Those employment taxes are among those also referred to as Trust Fund Taxes. And that is because a business owner or responsible person may become personally liable for the amount of those taxes if that person was in a position of responsibility to hold employee(s)’ money in trust.
Such employers or responsible persons are normally charged with making the federal tax deposit for the employee funds.
The Trust Fund Penalty may apply to you if you are:
- in a position of responsibility for making those deposits and;
- the IRS cannot immediately collect those unpaid trust fund taxes from the business.
Adding more urgency for responsible persons who may find themselves in this position is that the IRS does not need to move to take part in dissolving the business to assess this penalty.
Employment Tax Liability under the Trust Fund Penalty
It is important to understand that a ‘Responsible Person’ is a person or group of people who have the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:
- an officer or an employee of a corporation.
- a member or employee of a partnership.
- a corporate director or shareholder.
- a member of a board of trustees of a nonprofit organization.
- another person with authority and control over funds to direct their disbursement.
- another corporation.
What does it mean for a responsible person or entity to willfully fail to collect or pay employment taxes?
For willfulness to exist, the responsible person must/should have been aware of the outstanding taxes. And either intentionally disregarded the law or was clearly indifferent to collecting or paying them.
The IRS views as Willfulness when a responsible person uses available business funds to pay other creditors instead of paying employment taxes.
In assessing the Trust penalty the IRS will ask a responsible person to complete an interview in order to determine the full scope of their duties and responsibilities. This is just one of the several parts of the Trust Penalty assessment process. This is when it is probably a good idea for the potentially responsible person to seek professional advice.
The IRS is more likely to conclude that a person is ‘responsible’ if that person exercised independent judgment with respect to the financial affairs of the business. For example, an employee is generally not a responsible person if that employee’s function was only to pay the company’s bills as directed by a superior, rather than to determine which creditors are paid.
If you are having difficulties meeting your requirements as a responsible party, call us now for a consultation at 602-123-4567. You also have the option to complete our contact form here → Contact Us. Be sure to describe your situation in detail and a tax professional will contact you soon.
