Have you heard the term “Trust Fund Recovery Penalty” before? If you haven’t, you probably would not guess that it has anything to do with the taxes you withhold on your workforce’s behalf. If anything, it sounds like something to do with estate administration.
In fact, the IRS uses the Trust Fund Recovery Penalty (TFRP) to punish businesses that fail to pay their withholding taxes, such as FICA, Medicare and Social Security taxes. These are known as “trust fund taxes” because employers withhold the funds from their workers and place the money in trusts until it is time to pay.
How the TFRP works
If your company cannot pay its trust fund taxes in full when they come due, the IRS will likely take action -- and not against the business. As the agency explains on its website, the IRS has the power to assess the TFRP against “any person,” as long as that individual:
- Was responsible for collecting or paying withheld income and employment taxes, or excise taxes, and
- Willfully failed to do so
Willfullness is often a high standard to prove under the law. But for purposes of the TFRP, willfulness means that the accused person was aware that the company owed taxes (or should have known), and intentionally “disregarded the law” or simply did not do what they were supposed to. In other words, the IRS does not have to prove that you had a bad intention when your business’ taxes did not get paid on time.
How much can I be penalized?
The amount of the penalty depends on the allegedly unpaid tax amount, plus the accused employee’s portion of the withheld FICA taxes. This could run into thousands of dollars or more -- money you might be expected to pay personally.
What can I do to defend myself?
If you find yourself being threatened with a TFRP penalty, you need to speak to a tax attorney as soon as possible. You have the right to appeal the IRS’ decision, and to have a lawyer represent you.