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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 Trust Fund Recovery Penalty. 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 Trust Fund Recovery Penalty 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 Trust Fund Recovery Penalty to be assessed.
Who Can Be Responsible for the Trust Fund Recovery Penalty?
The Trust Fund Recovery Penalty 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, or another corporation.
Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.
The Internal Revenue Service will request that any potentially responsible parties complete an interview in order to determine the full scope of their duties and responsibilities. A Revenue Officer prepares form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business.
Assessing the Trust Fund Recovery Penalty
If the Internal Revenue Service determines that you are a responsible person, they will provide you with a letter stating that they plan to assess the Trust Fund Recovery Penalty against you. You have 60 days (75 days if this letter is addressed to you outside the United States) from the date of this letter to appeal their proposal. If a protest against the assessment is not made and appealed to the Internal Revenue Service, they will assess the Trust Fund Recovery Penalty.
Once the assessment is made, aggressive collection actions will follow. The Internal Revenue Service will take enforced collection action against your personal assets. They will file a federal tax lien or take levy or seizure action. This includes garnishing your wages or levying your bank account.
Stop garnishments, levies, and seizures. Direct Tax Relief will review your payroll tax options with no obligation. Our tax attorneys and enrolled agents will work to provide payroll tax debt relief to your company and resolve the Trust Fund Recovery Penalty.
