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Dealing with IRS Trust Funds

Dealing with IRS Trust Funds

Small businesses usually run into problems because of the IRS Trust fund. The money held by the employer in trust is used to pay the employee’s Social Security and Medical taxes. The cash is exempted from the employee’s paycheck and placed in the Treasury account monthly or semi-weekly. Sometimes a business may use the fund for suppressing purposes, leading to problems. For example, the employer may need to pay rent, equipment, or inventories, but there is low cash flow, backing them to the corner. And when the employer places other creditors above the government, the IRS will deduct the taxes from your paycheck. They sometimes take more than people may think.

Trust Fund Taxes: Definition 

Trust fund taxes are a deduction from income taxes, Social Security, and Medicare taxes withheld by an employer from an employee’s paycheck. When you receive payment, the employee removes some money to keep a share of social security tax and medical care tax. The withheld money is placed under the care of the Treasury. Trust fund taxes are placed in trust until they are remitted to the Treasury through Federal Tax deposits (FTD).

Penalty For Not Paying the IRS Trust Fund

When the employer does not deposit the fund as federal tax to the IRS, the agency will contact the employer. Sometimes, the employer will not receive a message until the unpaid tax obligations and penalties have accumulated. However, the IRS has established an early Interaction Initiative tasked with dealing with issues concerning tax compliance. The scheme aims at employers that are not up and doing in paying their taxes or have no record of payments. 

The IRS agent either visits, calls, or sends a letter to the business or who’s in charge of finances with information and directions regarding withheld taxes. Failure to comply with the early outreach, the agency will send a revenue officer to investigate the matter. The person responsible for the company’s finances will be under investigation. The process is referred to as a ‘trust fund recovery penalty investigation,’ and the IRS is allowed to settle with tax debtors. The taxes will be collected from the defaulted business and the individual with default taxes.  

What is the Trust Fund Tax Penalty?

A trust fund tax penalty is the total absence of unpaid taxes or more. The amount is determined by the defaulted payroll taxes and the amount of hold back FICA taxes by the employer. The delinquent taxes accumulate interest when paying the trust fund tax penalty (TFRP). Therefore, there is a high probability of paying more than you own when the agency comes for who’s responsible for the unpaid payroll taxes.

What happens next?

After the Internal Revenue Service (IRS) fishes out the defaulter, the agency will mail a letter including their plans to initiate the penalty. The falter is expected to reply within sixty days. The IRS begins its plan to collect unpaid taxes as soon as they assert the penalty on the responsible party or individual assets. The agency may go further to seize assets or file a federal tax claim. The agency still expects its full share of the trust fund recovery penalty even in bankruptcy. If you refuse to pay the debt, the IRS may become extreme by coming up with criminal charges. 

The penalty can be up to 10,000 dollars if you willingly declined to remit the trust fund taxes. Uncle Sam can also put you behind bars for five years and you still pay them fine. However, criminal charges are only necessary in extreme cases, like when the fund is embezzled for individual use.