The initial question at hand; What is the Trust Fund Recovery Penalty?
Every single employer is required to pay a trust fund tax to the government. A trust fund tax is an employer’s added responsibility to withhold money from an employee’s wages or salary—such as income taxes, social security, and Medicare taxes—and hold it in a trust until paid to the Internal Revenue Service (“IRS”). Through this withholding, the employees pay their contributions toward retirement benefits (social security and Medicare) and the income taxes reported on their tax returns.
If trust fund taxes willfully are not collected, not truthfully accounted for and paid, or are evaded or defeated in any way, the IRS may charge a Trust Fund Recovery Penalty (“TFRP”). This penalty is equal to the amount of the trust fund taxes evaded, not collected, not accounted for, or not paid to IRS, and may include interest on the penalty. The TFRP may be assessed against any person who the IRS decides is:
- Responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes; and
- Willfully fails to collect or pay them.
If a business is owned by one or more individuals, and only one individual can afford to pay the TFRP, then that individual is consequently responsible for 100% of the penalty. Although the TFRP may be considered against several individuals, the total liability is collected only once from either:
- The business;
- One or more responsible individuals; or
- The business and one or more responsible individuals.
(a) Responsible and Wilfulness.
A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. However, a mere authority to sign checks when directed to do so by a superior does not make a person “responsible.” This person may:
- Be an officer director;
- Own shares or has an entrepreneurial share in the business;
- Be active in managing the day-to-day affairs of the business;
- Make decisions regarding which, when, and in what order debts or taxes will be paid;
- Have the ability to hire and fire employees; or
- Exercise daily control over bank accounts and disbursement records.
For willfulness to exist, the responsible person:
- Must have been, or should have been, aware of the outstanding taxes; and
- Either intentionally, voluntarily and knowingly, or deliberately disregarded the law, or was plainly indifferent to its requirements (no evil intent or bad motive is required).
Even using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness. Further, this means that even when a business protects its individual owners from personal liabilities using a “corporate veil” —the IRS will “pierce” the corporate veil when it comes to the TFRP.
So, with that said, how can you avoid the TFRP?
An employer or business can avoid the TFRP by making sure that all employment taxes for each employee are collected, accounted for, and paid to the IRS when required. If the IRS has already deemed you a “responsible person” who willfully failed to collect or pay trust fund taxes, or you need more information on how to avoid exposure to the TFRP, please contact EPGDLaw to find out how we can assist you.
*Disclaimer: This blog post is not intended to be legal advise. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*