Trust Fund Recovery Penalty

Trust Fund Recovery Penalty

Employers have a responsibility to withhold income from their employees’ earnings and deposit those withholdings and employment tax with the Internal Revenue Service.  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.  To encourage prompt payment of these trust fund taxes, Congress has passed a law that allows for certain individuals to be personally penalized for the failure of to properly withhold and deposit these taxes.  This penalty is called a Trust Fund Recovery Penalty.

What is the Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty is a penalty in the amount equal to the unpaid balance of the trust fund tax.  It essentially authorizes the Internal Revenue Service to penalize an individual personally for the failure of the business to pay the taxes.

Who Can Be Responsible for the Trust Fund Recovery Penalty?

The Internal Revenue Code authorizes the assessment of the Trust Fund Recovery Penalty against any person who: (1) is responsible for collecting or paying withheld income and employment taxes, and (2) 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.  The Internal Revenue Service generally looks to the owners of the business, and those with authority and control over the funds of the company.

For willfulness to exist, the responsible party: (1) must have been, or should have been, aware of the outstanding taxes, and (2) either intentionally disregarded the law or was plainly indifferent to its requirements.

The Internal Revenue Service will typically investigate irregularities with employment tax payments and informational returns, such as the Form 940 & Form 941.  When a business has problems with employment tax liabilities, all owners, directors, and some employees have a significant reason to be concerned about a potential assessment of the Trust Fund Recovery Penalty.

What To Do?

Once the Trust Fund Recovery Penalty is assessed, the Internal Revenue Service can take collection action against personal assets. If you are contacted by the Internal Revenue Service, you need to seek the immediate advice of an experienced tax attorney.  The most important time to resolve a potential Trust Fund Recover Penalty is before the penalties are assessed against you personally.  The Internal Revenue Service needs to be contacted by your counsel in order to protect your rights against the Trust Fund Recovery Penalty.  If the Trust Fund Recovery Penalty is assessed to you already, you still have many options in order to resolve the assessment of the penalties.  At Martelle, Bratton, and Associates, P.A., we offer potential clients the opportunity for a no-obligation consolation.  We represent clients throughout the United States with Internal Revenue Service matters.

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