The name might imply that a trust fund recovery penalty only affects the elite, but it actually has nothing to do with trust funds.
All businesses go through hard times now and then. When things start to get really bad, business owners might be tempted to cut corners to ensure that they keep their sinking ship afloat. One final, or desperate, act might be to stop paying employee taxes to the government. This is often a last-ditch effort to shore up finances.
Unfortunately for business owners, failing to give the IRS money from employee taxes can spell disaster and result in what’s called a trust fund recovery penalty (or “TFRP”). This is TFRP is an IRS civil penalty.
HOW TO AVOID A TRUST FUND RECOVERY PENALTY
The best way to avoid getting a trust fund recovery penalty, also known as a civil penalty, is to forward all quarterly taxes from your employees to the IRS. As long as your company collects taxes from all employees and pays payroll taxes on-time using IRS form 941, you won’t have to worry about getting charged with a stiff penalty.
Business owners aren’t the only ones who can get charged with the penalty. The IRS can assign a penalty to anyone they believe has willfully and knowingly withheld taxes from the government. They can even assess a penalty to someone who knew that the employer was holding back taxes but had no control over the situation.
Let’s say you’re an employee who overheard your employer talking about how they stopped sending employee taxes to the IRS. Even if your job function has nothing to do with managing payroll, you could still get assessed with a penalty.
The good news in the above scenario is that the IRS is not legally able to assign a penalty to someone who knew about the withholding of taxes but had no control over it. They can only assign it to someone who has personal responsibility for withholding taxes, such as a partner, corporate director, shareholder, officer, payroll service provider, or employee whose job function allows them to willfully and actively withhold tax payments to the IRS.
When it comes to assigning penalties, the IRS takes a “the more the merrier” approach and tends to lean more on the side of overaggressive, than giving the benefit of the doubt. They are more than happy to assign a penalty to as many people as possible so they can collect as much extra money as possible. They only have a limited window of three years to collect, so they don’t want to waste any time.
WHAT TO DO IF YOU GET A TRUST FUND RECOVERY PENALTY
If you’ve already been hit with a trust fund recovery penalty, you can appeal the trust fund recovery penalty once it has been imposed on you. If that doesn’t work, then you can take your case to U.S. Tax Court. You can also work with the IRS to set up a payment plan to repay the taxes.
If you have been issued a trust fund recovery penalty, we recommend that you work with a tax legal expert who can help you find the best solution for your business. Contact us today for a free consultation to learn more about your options.