Posted by Elliot Kravitz, ATP

Trust Fund Recovery Penalty

Trust Fund Recovery Penalty

What is the trust fund penalty?

The term "trust fund" has a varied meaning when applied to labor tax rather than asset management. This is the amount of payroll tax levied on the company's employees. When the IRS relates to a trust fund in business terms, it refers to funds recovered from withholding tax that the employer is responsible for filing on your federal income tax return. These taxes are called "trust fund taxes" because the employer keeps the money in custody until deposited. A trust fund penalty applies when the charges are withheld by the employer but are not used for the charges for which they are intended. Resolving taxes can help reduce and/or arrange payment of these taxes.


What is a TFRP (Trust Fund Recovery Penalty)?

A trust fund recovery penalty (TFRP) may apply if the company cannot immediately collect unpaid trust fund taxes. Although the company collected the taxes, they did not file them with the IRS for any reason. Under International Tax Code 6672(a), the person responsible for collecting and filing these taxes may be subject to a fine for non-compliance, accounting, or payment of business taxes with the IRS.


Why is there a penalty for recovering the trust fund?

You may be asking yourself: "Why such a punishment?" Well, the logic of the IRS for imposing severance pay is that the person responsible for those taxes had the funds in the custody of the government. Therefore, the IRS will take action against people who have failed to manage their business and government affairs. While the company can protect employees from personal liability, the sanction of collecting the trust fund can still hold someone accountable if your company fails to send the necessary funds.


Who is affected by the penalty for collecting the trust fund?

It may seem logical that the IRS simply assesses the business itself with the penalty of recovering the trust fund for unpaid corporate taxes. However, severance pay specifically penalizes workers who have not paid their business taxes. To determine who should be penalized, the IRS must determine who is "responsible" for unpaid payroll taxes and whether they "willfully" neglect those taxes. Finally, these two factors contribute to the IRS TFRP assessment of individuals. IRS Notice 784 is a basic guide for people who believe they are responsible for unpaid federal taxes.


Responsibility

IRC Section 6671(b) defines a "responsible person" as a commercial employee responsible for collecting and/or paying necessary labor taxes. The IRS considers the company's status and the individual duties of the position; the party audited for compensation must have significant power over the company's finances. More specifically, the "responsible" party must be a person or party who can administer and control the collection, accounting, and payment of taxes from trust funds.


A responsible person is determined by:

  • A business manager or shareholder whose duty is to collect and pay taxes,

  • A member or employee of a company whose mission is to collect and pay taxes,

  • An officer or employee of a company whose task is to collect and pay taxes,

  • Another paying company or a third party,

  • Another person with authority and control over the funds to direct your payments,

  • Member of the board of directors of a non-profit organization,

  • Payroll service providers (PSPs) or responsible parties within a PSP,

  • Professional employers' organizations (PEO) or responsible parties within a PEO or

  • Responsible parties within the common law employer (PSP/PEO client).


Willfulness 

After careful analysis, the IRS will investigate the "willfulness" party to determine its "intention." The main factor in determining "willfulness" is whether the decision of the responsible person not to pay the required taxes was a conscientious one. Additionally, the IRS does not consider whether the responsible party's decision was made with malicious intent. Simply put, the responsible person will be responsible for the lack of taxes if he is found guilty of it willfully and knowingly.

Examples of "willfulness" may include:

  • Indifference to the law

  • Intentional violation of the law

  • Knowledge of overdue taxes

  • A person with the authority and power to control the disbursement of funds.

  • Use the funds available to pay creditors when they cannot pay social charges.


Who can be held responsible for sanctions for the recovery of trust funds?

Courts usually determine this issue on the basis of a person's control over commercial payments. This can include business owners, CEOs and directors, employees, outside payroll administrators, outside accountants, and bookkeepers. For companies, shareholders can also be held responsible; and for non-profit organizations, board members can be held accountable.


Is there a statute of limitation on TFRP Assessment?

In general, assuming Forms 941 or comparable reports are completed on time, the IRS has three years to assess the April 15 compensation payment, which has occurred through the due date. If the return from the company was filed after the expiration date, the limitation period begins on April 15, which occurred with the return expiration date or three years after the return request, whichever is later. However, false or fraudulent statements prepared by the IRS do not trigger the running of the statute.


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Elliot Kravitz, ATP
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