The IRS has measures in place to get paid, just like any other business. In order to ensure that businesses appropriately withhold — and pay — their employees’ income, Social Security, and Medicare taxes, there are, of course, penalties. Any business that willfully fails to pay the required payroll taxes is going to be subject to the trust fund recovery penalty (TRFP). This is what you need to know about the TRFP and how to handle it appropriately.
What It Is
As mentioned, the TRFP is a financial penalty imposed by the IRS for businesses that fail to make certain payments. In essence, it’s a penalty for businesses that hold onto each employee’s taxed wages that, by rights, should go to the government entity. By withholding those taxes, no matter what the purpose was, a business is seen as holding that money “in trust” on behalf of their employees, and the TFRP is intended to help the IRS recover the fees they are owed. However, despite the wording, the responsibility for paying the TRFP does not fall to each employee; it is the responsibility of the business itself, or any employees of the business who are responsible for some level of financial operation.
Defining Who Is Responsible
In the case of TRFP, the IRS looks to individuals or groups within a business who are responsible for collecting/paying income and employment taxes. The fault can fall on a single individual within the company, or it may fall to the company’s payroll service providers (PSP). The list of potentially responsible parties can be found on the IRS website.
The other side of the coin is that TRFP comes into play specifically when there is willfulness in regard to the lack of payment. The responsible party should have been aware that the taxes were outstanding, and to either intentionally disregard the law or be indifferent. A common example of willfulness, in this case, is when a business uses their employees’ withheld taxes to pay other creditors, rather than the IRS.
How to Handle TRFP Situations
At the outset, the solution may seem simple: pay the outstanding taxes. The complications come in when considering how the courts will determine who is responsible. For instance, the responsible party may be an individual who holds bookkeeping responsibilities and check-signing authority. However, if that individual needs some level of direction from a controller or someone in a position of authority, that individual may not be held responsible. Ultimately, the answer will vary from one company and scenario to the next.
The TRFP process starts when the IRS initializes an investigation. They may require relevant documentation to determine responsibility and wilfulness, which can include bank documents, corporate records, and so on. Given how drawn-out and complex the process can be — and the fiscal impact it can have on a business — it is a good idea to work with a tax consultant familiar with the legal ins and outs of corporate tax problems.
We have years of experience serving as corporate tax consultants and providing IRS tax relief help for a variety of businesses. If you are facing a TRFP situation, connect with our tax law offices to speak with a tax consultant and learn how we can help.