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Trust Fund Recovery Penalties

If your business has a payroll tax liability, the owners of the business could be personally assessed for the trust fund portion of the payroll tax liability. The IRS considers these types of taxes to be trust fund taxes because the business holds the employee’s money in trust until they make a federal tax deposit in that amount. This assessment against the owner or responsible person is called the trust fund recovery penalty, and the IRS may seek to assess the trust fund recovery penalty against any person who:

  1. Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
  2. Willfully fails to collect or pay them.

Who is a responsible person?

A responsible person is a person who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This is a broad definition and may include:

  • 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 or third party payer,
  • Payroll Service Providers (PSP) or responsible parties within a PSP
  • Professional Employer Organizations (PEO) or responsible parties within a PEO, or
  • Responsible parties within the common law employer (client of PSP/PEO).

Willfully” means voluntarily, consciously, and intentionally. A bad motive is not required. Willfunless exist when the responsible person must have been, or should have been, aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements.

The amount of the penalty is equal to the unpaid balance of the trust fund tax. The trust fund tax includes: 1) the unpaid income taxes withheld, plus 2) the employee’s portion of the withheld FICA taxes. It does not include the employer’s share of payroll taxes. Hiring a payroll tax attorney will help you face employment tax issues.

Contact a Payroll Tax attorney

If you are facing employment tax issues and have questions about the trust fund recovery penalty, contact a tax attorney that specializes in payroll and trust fund recovery penalty representation for a free consultation.

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