The trust fund recovery penalty is to encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the TFRP. These taxes are called trust fund taxes because you actually hold the employee’s money in trust until you make a federal tax deposit in that amount. The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.
Who Can Be Responsible for the TFRP?
The TFRP may be assessed against any person who:
-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.
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. This person may be:
-An officer or an employee of a corporation,
-A member or employee of a partnership,
-A corporate director or shareholder,
-A member of a board of trustees of a nonprofit organization,
-Another person with authority and control over funds to direct their disbursement,
-Another corporation or third party payer,
-Payroll Service Providers (PSP) ore responsible parties within a PSP
-Professional Employer Organizations (PEO) or responsible parties within a PEO, or
-Responsible parties within the common law employer (client of PSP/PEO).
For willfulness to exist, the responsible person:
-Must have been, or should have been, aware of the outstanding taxes and
Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).
Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.
The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on:
-The unpaid income taxes withheld, plus
-The employee’s portion of the withheld FICA taxes.
-For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.
You can avoid the TFRP by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required.