rust fund penalties can affect the small business negatively. Ideally, an employer needs to withdraw some amount of money from their worker's wage to pay income taxes. Such funds are held in trust, which should be paid to the Treasury monthly or semi-weekly.
At times, businesses could use such funds for another purpose, which results in problems. The employer might have the intention of repaying such borrowed funds, but cash flow is unpredictable.
Many business owners do not realize that Uncle Sam can personally come after them for back taxes and go to lengths to get their hands on essential taxes.
Understanding Trust Fund Taxes
Typically, a business does not pay an employee all the money they earn. The employer has to withhold income for taxes and other parts of Medicare and Social Security. Employees believe and assume that their boss will send such funds to the IRS on their behalf. This explains why it is called trust fund taxes.
When an Employee doesn’t pay the Trust Fund taxes?
In cases when Uncle Sam doesn't get the federal tax deposits or receives a smaller deposit, Uncle Sam will try to contact such a business owner. In the past, the IRS typically waited until the unpaid tax started getting out of hand. In 2015, however, the Early Interaction initiative was launched to take care of compliance with payroll taxes.
This initiative makes it easy to identify employers who are falling behind on tax payments. A representative from the IRS will reach out to such an employer via a letter, call or personal visit. Most of the time, the intention is to offer guidance.
In cases when such outreach fails to take care of the delinquency, there will be an investigation. This will focus on detecting who decides the firm's finances, called the trust fund recovery penalty investigation. It allows Uncle Sam to collect unpaid trust fund taxes. Sadly, both the business and its assets suffer for not remitting trust fund taxes.
Penalty for Trust Fund Taxes
The penalty, most of the time, is the same as the balance of the payroll tax that was not paid. It is usually the amount of unpaid taxes taken from the employee's portion of FICA taxes, most time with interest. In most cases, the guilty party might pay more than the unpaid payroll taxes.
Who will be responsible?
In case when Uncle Sam can’t collect such late payroll taxes from business owners, such a penalty may be levied against any party in charge of the collection or payment of the tax who intentionally refuses to pay. This might be anyone who can decide how the available cash of such business is used. As a result, these could be shareholders, officers of the firm, members of the boards, and employees who have signatory authority over the firm's bank account.
Uncle Sam bases responsibility on whether the person can decide which creditors to pay. As a result, you can be spared if you pay bills because the supervisor directed you. However, if you can determine which bills will be paid, you might be held responsible, not minding if you are part of the business owners.
Important Things to Consider
When the revenue officer determines the responsible party, they will forward a letter revealing their plan to engage the trust fund recovery penalty. Whoever receives such a letter gets 60 days to appeal. Once Uncle Sam determines the penalty, it can start a collection attempt against the party in charge of their asset. It might involve seizing their assets or filing a federal tax lien. Such recovery penalties are usually exempted from cases of bankruptcy.
Failure to pay in extreme cases might trigger criminal charges. You might be charged up to $10,000, five years in prison, or both if you willfully refuse to collect and remit your trust fund taxes.
However, the silver lining is that Uncle Sam only applies criminal charges to extreme cases when the funds were directed for personal use.
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