Posted by Abundant Wealth Planning LLC

Penalty Taxes & Risks Attached to Violations. Are you in Danger?

Penalty Taxes & Risks Attached to Violations. Are you in Danger?

Under federal law, employers are required to withhold certain funds from their employee's wages and remit them to the IRS as income and payroll taxes. United States Code Sec. 6672(a) provides that "any person under a duty to collect, account for, and pay tax" who knowingly fails to do so will be liable to a "fine equal to the full amount of the tax" not paid.

The term "any person" is important because it allows the IRS to hold certain people in a business personally liable for unpaid payroll taxes by their employer. This distinction is significant because it counteracts one of the main advantages of owning a legal entity: the limitation of the personal liability of those who manage the business. Hence, "Limited Liability" in the Limited Liability Company or LLC.  

A responsible person is a person or group of persons who has the duty to perform and the power to direct the collection, recording, and payment of trust funds taxes. The IRS can personally sue anyone "responsible" for non-payment of payroll taxes, even if they are not the business owner. It can be a director or an employee of a company, a member or an employee of a partnership, a director or a corporate shareholder, a member of a non-profit organization's board of directors, and even payroll service providers.

Recently, companies that collect funds from employees to pay payroll taxes and redirect the funds for their benefit have become priority targets for the Internal Revenue Service. It bears repeating that risk is not limited to losing trades. Instead, personal liability and criminal charges are very real risks.

IRS investigations are complex, and defending any claim costs time, stress, and money for everyone involved.


The penalty for recovering the trust fund is frightening because it is real.

The IRS website explains that "to encourage the timely payment of withholding and income taxes. Congress has passed legislation providing for severance pay." The trust fund recovery deed is named because the employer withholds money from an employee's salary and holds it "in trust" until the funds are sent out as a federal tax return.

Once the IRS determines that a person is responsible for a willful violation of the trust fund payment, the IRS provides a letter stating that the person has 60 days to appeal. If you do not object, this 60-day letter will be followed by a notice and a payment request.

What does it mean to be willful?

Demonstrating willfulness is a crucial aspect of prosecuting in almost all criminal proceedings. Courts generally consider fraud to occur if a taxpayer recklessly knows about or neglects a particular debt or obligation.

In these cases, a big red flag for the IRS is when a business uses available funds to pay other creditors. A struggling business or even a healthy business with cash flow problems. When a company pays creditors that it would not otherwise be able to pay with the "trust fund" employment tax, it is an indication of willfulness. In other words, the fact that a company has debts that it has not paid will serve as proof of intent to commit the crime. Indeed, these are the circumstances most likely to lead to the commission of this crime.

It is important to understand that acting under pressure or duress is unlikely to justify willful misconduct. Defendants often claim that they acted under the pressure of extreme hardship or extenuating circumstances hoping that the court would be lenient. However, a court is unlikely to consider a person's or company's financial circumstances when determining whether the non-payment of tax owed was intentional.


According to the IRS website, "the amount of the fine is equal to the balance of unpaid tax on the trust fund, and the fine is based on the amount of unpaid excise duty collected." In addition to the late fees and interest paid for unpaid taxes on trust funds, penalties for trust funds can increase exponentially over time. To make matters worse, penalties cannot be discharged in bankruptcy.

The more severe the fines for non-payment of trust funds, the more serious it is that non-payment of taxes to the trust fund could result in criminal charges and jail time. Historically, criminal charges have generally been reserved for the most serious cases or a threat used to benefit the government in plea bargains. Still, recently the IRS has shown an increasing willingness to prosecute those who intentionally violate their payroll tax duties. The IRS is aggressive in assessing trust fund sanctions and becoming more aggressive in pursuing criminal prosecution.

Suppose you or your business has received an audit notice from the IRS or received a notification from the IRS that you do not understand. In that case, you must contact an experienced tax attorney as soon as possible. Mistakes made early in the trial can have avoidable consequences, such as forfeiture of assets, fines, and even jail time.

Does the IRS look at my small business?

Assuming that your small business will fly under the radar of the IRS is one of the main reasons why small business owners can be especially vulnerable to lawsuits under the Trust Fund Recovery Act. Small businesses lack the resources needed to implement safeguards and internal controls. On the other hand, large companies include these guarantees in their annual budgets and often also have teams of emergency lawyers in the event of an accident.

Instead, out of necessity, many small businesses delegate accounting responsibilities and duties to their employees well beyond their experience. The US tax code is one of the most complicated of all. Even the most honest, knowledgeable, and hardworking employees face countless opportunities to come into conflict with the IRS. If someone is actively trying to commit financial fraud, a small business often doesn't have the oversight to catch them until it's too late. Except for defense to willfulness, negligent accounting is a poor excuse.

Avoiding the Trust Fund Recovery Penalties

According to the IRS website, "You can avoid paying the trust fund recovery penalties by ensuring that all payroll taxes are collected, accounted for, and paid to the IRS when needed. Make your tax filings and payments at a time." An experienced tax attorney can help protect your business and personal assets, including your liberty.



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