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What to know about the Trust Fund Recovery Penalty

On Behalf of | Aug 11, 2023 | Blog, Tax Debt |

As a business owner, you take money out of your employees’ paychecks for FICA and income taxes. If you are not directly involved in the process, you may think your company automatically transfers it to the IRS, or you may not think about it at all.

However, what if the money never makes it to the IRS? This is where the Trust Fund Recovery Penalty (TFRP) comes into play.

How do income taxes and FICA work?

The money your company withdraws from your employees’ checks should go to the IRS on a regular basis. The company cannot use this money for business expenses. Most often, you should place it in trust until you need to transfer it.

What is TFRP?

The TFRP or responsible person penalty holds your company or the responsible person liable if these payroll taxes do not get to the federal government on time. If your company does not put these taxes in trust, the IRS can charge it a penalty equal to the taxes and FICA amounts that you withheld. For example, if your company took $5,000 out of one employee check and used it, it has to pay the IRS the original $5,000 in addition to a $5,000 penalty. Now, imagine if your company used these withdrawals from 10 or 100 employees.

What happens to employees?

Anyone in the company with the responsibility for submitting this amount in a timely manner may submit to an investigation. As an employee, you are not responsible, and your account will show paid.

For the best results, develop a policy that specifically addresses employee income tax and FICA payment processing.