Posted by Tim Thompson CPA PLLC

Dealing with IRS Trust Funds: How to Sort it out with the IRS

Dealing with IRS Trust Funds: How to Sort it out with the IRS

Business owners must file their tax and send what is due to the IRS the same way individual taxpayers do it. Companies must pay taxes on their profit alongside withholding taxes from each worker's paycheck.

Failure to hold out social security, Medicare, and income tax from your employees' paycheck might trigger IRS penalties. We have four tips here that can help you protect yourself from federal trust fund tax issues.

Who Must Pay Trust Fund Taxes?

Whatever the IRS withholds from your paycheck, they use it to take care of Medicare, Social Security, and income tax, known as trust fund taxes. Companies taking care of people's payroll must pay this tax – either quarterly or annually. Such individuals are:

  • Ceos

  • Directors

  • Employees

  • Bookkeepers

  • Shareholders

  • Payroll administrators and 

  • Business owners  

Failure of any of these people to send in the required money as tax to Uncle Sam could trigger a hefty Trust Fund Recovery Penalty.

With any penalty the IRS throws at you, there are various resolution methods with which you might settle. When you use the right approach, you can avoid extreme fines on your income and assets.

Installment Agreements for Trust Fund Taxes

No matter how successful your business is, settling the IRS with a considerable tax debt could be hard. If you are financially incapable of paying off what you owe, there is an option to request that the IRS work on an installment agreement with you.

With the agreement, you should be able to settle your tax debt monthly. This payment rate is a factor of your income and the worth of your asset. With this option, you can pay your tax debt and get your TFRP situation out of the way.

Make an Offer in Compromise

Monthly payment could be hard for business owners having issues with their financial situation. This category of people needs a practical approach to settle it without unnecessary financial stress.

There is an option for an Offer in Compromise with the IRS. You must put forward a reasonable alternative that accurately reflects the financial means available to you. Besides, be sure to pay this in full and in time. An OIC can completely wipe off your financial debt and get rid of issues, including fines.

Consider the Statute of Limitation

Uncle Sam does not have eternity to collect the tax debt from you and the trust fund taxes. They have three years to collect the money from you after filing the quarterly or annual federal tax return for your business. Once it is after three years, you might be excluded from paying the TFRP.

Bear in mind that if you are guilty of fraud when filing your quarterly or annual tax, TFRP will still apply. In any case, you will again face TFRP that might correspond to the entire tax debt amount.

Prove You Do Not Owe the Trust Fund Taxes

Anyone in a company will have to pay the trust fund tax of the company each year. However, this is the factor of the company you have because you can escape penalty by proving that you were not in charge of it.

This is a tricky defense because you are passing the blame to another person within the company. But if you want to keep your asset and income safe, you can reveal that you did not avoid paying the tax, yet Uncle Sam wrongly targeted you.

You, however, need proof to back up your claim with essential documents. Such as tax records and affidavits. Also, the IRS Form 4180 will help the IRS confirm if your case applies as requested by each IRS investigator.

For people found to be liable for the TFRP, you can request leniency to avoid financial embarrassment based on your present financial status. Filing and submitting IRS Form TFRP qualifies you for an exemption.

You should know that the TFRP can be deadly on your business finances. With these four tips, you can settle your tax debt and sort out your situation.


Tim Thompson CPA PLLC
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