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Avoiding the trust fund recovery penalty (TFRP)

On Behalf of | Apr 12, 2021 | Tax Debt |

Business owners in Washington State are required to withhold certain federal taxes from their employees’ paychecks. These taxes include federal income taxes, excise taxes, FICA, Social Security taxes and railroad retirement taxes. When business owners fail to collect these taxes or to pay them on time to the Internal Revenue Service, the IRS may assess the trust fund recovery penalty against them.

What is the trust fund recovery penalty?

The trust fund recovery penalty, or TFRP, was created by Congress to encourage businesses to remit the taxes they withhold to the federal government on time. When business owners withhold the required taxes from their employees’ paychecks, they are supposed to hold them in trust until it is time to remit them to the IRS.

Anyone who is responsible for withholding and submitting these taxes to the government may be assessed the TFRP when they willfully fail to collect or remit the taxes on time. The TFRP penalty amount is equal to the total of the unpaid tax balance or the employee’s federal income tax and the employee’s unpaid portion of the Social Security and FICA tax.

Notice and appeal

If the IRS believes a business has failed to collect or pay the required taxes for its employees, a notice will be sent to the responsible party. That party will then have 60 days to file an appeal of the assessment. The letter will contain information about the taxpayer’s appeal rights. If an appeal is not filed, the TFRP will be assessed. The IRS will then send a notice and demand payment. Business owners can avoid the TFRP by ensuring that they collect all of the required taxes and make their tax deposits with the IRS on time.

Business owners who have failed to collect the required taxes or have fallen behind on their tax deposits and accumulated tax debt could face legal trouble. In this case, it may be best to consult with an experienced tax law attorney about the situation. A lawyer might help his or her client to get into compliance and negotiate with the IRS to avoid the assessment of penalties. If a notice has already been received, a lawyer might help the business with filing an appeal.