Businesses with employees must withhold income, Social Security, and Medicare taxes from their employees’ paychecks. These amounts are then paid to the IRS at the end of each quarter. Until paid, the business holds these funds in trust for the IRS. Because of this, these taxes are referred to as Trust Fund taxes.
If a business fails to withhold or pay these taxes, the IRS will hold the business liable. Liens can attach to the company’s assets, and if the IRS cannot collect from the business (due to closure or inability to pay), they can pursue individuals responsible for withholding and submitting the taxes. This is known as the Trust Fund Recovery Penalty.
Trust Fund Recovery Penalty
The IRS can only impose the Trust Fund Recovery Penalty on an individual if it can prove that the individual was responsible for withholding and paying the taxes but willfully failed to do so. Factors that determine responsibility include:
- Power to pay or determine which bills are paid
- Decision-making authority
- Control over company funds
- Authority to hire and fire
Willfulness is determined by:
- Control over company funds
- Choosing to pay other bills before the IRS
- Knowledge of unpaid taxes
The Trust Fund Recovery Penalty can be one of the most severe civil penalties the IRS imposes. Unpaid trust fund taxes can accumulate into the thousands or millions, potentially making the individual taxpayer personally liable.
Resolving the Trust Fund Recovery Penalty
The good news is that the IRS offers remedies for resolving the Trust Fund Recovery Penalty, such as an Offer in Compromise, Installment Agreement, or Currently Not Collectible status. If you are unable to pay, the IRS is likely to agree to an alternative payment arrangement.
An experienced Dallas tax attorney from Margolies Law Office can help defend the business against an inaccurate trust fund assessment. If the penalty is imposed, they can also defend the individual from the penalty.