How the Trust Fund Recovery Penalty can impact your business

By
Education & Training with Pruett Tax Law

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. 

 

Comments (3)

John Pusa
Berkshire Hathaway Home Services Crest - Glendale, CA
Your All Time Realtor With Exceptional Service

Hello Ben Pruett very good report about how the trust fund recovery penalty can impact a business.

Nov 09, 2021 07:42 PM
Ben Pruett

Thank you John Pusa 

Nov 10, 2021 09:50 AM
Roy Kelley
Realty Group Referrals - Gaithersburg, MD

Thank you very much, Ben, for sharing your experience and your advice.

Nov 10, 2021 04:27 AM
Ben Pruett

Thank you for the feedback Roy Kelley 

Nov 10, 2021 09:51 AM
Gwen Fowler-864-638-3599 SC * Mountain* Lake*Home
Gwen Fowler Real Estate, Inc - Walhalla, SC
Gwen Fowler Real Estate, Inc.

I have 7 employees and I spend 2 days a month trying to stay ahead of the tax man and his long fingers.

 

Nov 10, 2021 06:49 AM
Ben Pruett

Hello Gwen Fowler-864-638-3599 SC Mountains Lakes Homes, please let me know if you have time to discuss as I may be able to help give you some of that time back

Nov 10, 2021 09:52 AM