It is incumbent on business entities with employees on its payroll, to withhold certain taxes from their employees' pay. For example, such taxes are the employer's portion of Social Security and Medicare taxes. When employers fail to remit these withholdings to the Treasury, for whatever reason, the penalties can be severe.
The taxes withheld from employees' pay is held "in trust" for payment to the Treasury. The Trust Fund Recovery Penalty (TFRP) is a tool the government uses to pursue collection of the unpaid trust fund portion of payroll tax against third parties. The TFRP is used to collect these amounts from taxpayers who are not directly liable for such taxes but who possess the power to control a business entity's finances. For the TFRP to apply, the person who the penalty is being assessed against must be responsible for collecting, truthfully accounting for, and paying over the tax to the Government. Additionally, that person must have willfully failed to do so. The TFRP is not a penalty in the traditional sense, because it is not an addition to tax. Rather it is a collection device used by the Treasury and IRS. The amount of the TFRP is equal to the amount of the tax that has been evaded or not collected. This is one area of the tax code where criminal and civil penalties can be assessed.
A responsible person who willfully fails to remit the trust fund taxes to the Treasury can be guilty of a felony and can be fined up to $10,000, imprisoned for up to five years, or both. In my experience, the TFRP is assessed against businesses that are already struggling and are likely to ignore the issue hoping it goes away. But the issue never goes away and the amount the IRS seeks will only increase.
If you or someone you know has been contacted by the IRS regarding the TFRP, options for relief may be available. Don't try to face the IRS alone. Contact a reputable tax attorney to provide assistance.
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