Payroll taxes plus income taxes withheld from an employee’s wages are collectively referred to as “Withholding Taxes” or “Trust Fund Taxes.” As the employer, you essentially are holding these funds in trust until they are paid to the IRS.
As part of your business (and as required by the IRS), you need to collect and pay the IRS taxes that are withheld from employees’ wages. Together with your share of Social Security tax, these are then deposited in your bank account before being transferred to the IRS. You’ll probably be filing a quarterly federal tax return, otherwise known as a 941 Return and the annual Federal Unemployment (FUTA) Tax Return (940 Return).
What is the Trust Fund Recovery Penalty (TFRP)?
So what happens if you have a payroll tax problem and you have to deal with the IRS to resolve it? First, you should be aware that Congress passed the Trust Fund Recovery Penalty Statute (IRC 6672) to encourage prompt payment of payroll taxes. Through this statute, the IRS can go after responsible third parties [IRC 6672] for willfully failing to collect, account for, and pay trust fund taxes.
Which taxes do the TFRP apply to?
The TFRP applies specifically to unpaid federal income tax withholding, Social Security tax (FICA), and Medicare tax withheld from employees’ wages, as well as the employer’s share of Social Security and Medicare taxes.
Who is liable under the TFRP Statute?
The TFRP can be imposed on any person or group of people who are responsible for collecting, accounting for, or paying over the trust fund taxes.
To know if you are subject to this statute, first ask yourself:
- Did you have a duty to account for and collect payroll taxes?
- Were you responsible for giving them your trust fund payroll taxes?
- Did you fail to hand over your trust fund payroll taxes?
If the answer to any of these questions is yes, then you may be liable under the TFRP statute. It is important to note that the TFRP applies not only to businesses but also to individuals who have control over the finances of a business. This means that even if you are an employee but have control over the business’s finances, you can still be held liable for trust fund taxes.
The TFRP is a serious matter and can result in severe penalties, including fines and potential criminal charges. Therefore, it is crucial to understand your responsibilities and ensure that you comply with the law regarding the collection and payment of trust fund taxes.
What are the potential consequences of a TFRP assessment?
If the IRS can’t get it from the company, they will go after officers, directors, owners and others. The responsibility is usually held by a high corporate official in Finance who handles payments to creditors.
If the IRS assesses the TFRP against an individual, that person becomes personally liable for the unpaid trust fund taxes. This means the IRS can pursue collection actions against the individual’s personal assets, including bank accounts, property, and wages.
And if the IRS can’t collect, they will move to shut down the business and sell the assets. Although a last move, this could prove disastrous to any business.
I want to contest the TFRP; what should I do next?
If you want to contest the TFRP, there are certain steps you can take to protect yourself and your business. At the law office of Steven N. Klitzner, we have the knowledge and experience necessary to assist you and/or your business with your payroll tax problems. We can provide you with guidance on the best course of action and help you navigate the complex process of contesting the TFRP. We can also negotiate with the IRS on your behalf and present your case in the most favorable light.
Dealing with tax issues can be one of the most stressful times of anyone’s life. Don’t handle it alone; contact the office of Steven Klitzner today for a free and confidential consultation.
