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What You Need To Know To Settle IRS Trust Fund Recovery Penalties

What You Need To Know To Settle IRS Trust Fund Recovery Penalties

Employers withhold the contributions on Social Security and Medicare from the paychecks of their employees. Sometimes, they also withhold earnings tax. These withholdings are known as Trust Fund Taxes and every employer is obligated to send this money to the Inland Revenue Service.

Failure to do attracts a serious penalty known as ‘Trust Fund Recovery Penalty (TRFP)’.

Trust Fund Recovery Penalty Defined

This is a penalty faced by employers for withholding of Medicare, Income tax and Social Security payments from their employees’ checks. This is a heavier penalty charged by the Inland Revenue Service. The Agency does not joke with it. Any employer found culpable for missing payment of this tax will have their assets confiscated to recoup the fund.

Who Bears the Responsibility For TFRP?

This penalty is levied on anyone who fails willfully to obtain and remit the trust fund taxes. This comprises of Business Owners, Chief Executive Officers, Directors and sometimes employees, administrators of payroll, tax accountants, tax preparers and bookkeepers. In case of a corporation, shareholders may be held responsible. Board of Trustees members of a non-profit making organization may also be held responsible for Trust Fund Recovery Penalty.

The bottom line is that anyone saddled with the duties of collecting and paying of taxes could be held responsible. Those who are aware of taxes not being paid can also be levied. The Inland Revenue Service can hold group responsible and they are empowered to go to any length to recover the fund.

IRS establishes responsibility by proving that an individual or a group was conversant with the fact that taxes were due and were not paid. The subject must have willfully or purposefully ignored the provision. For instance, if a tax preparer used the money set out for income taxes or payroll to settle personal expenses, this is a clear indication of willfulness and purposefulness.

How Much is the TRFP Amount?

The amount is not inconsequential. In some cases, it is the equivalent of the amount of unpaid taxes. It also includes withholdings from income taxes, Social Security and contributions to Medicare. The Federal Insurance Contributions are also known as Social Security and Contributions to Medicare).

Example:

Jane’s employer pays her $2000. He indicated on the check stub that $200 was withheld as income tax, $124 for Social Security and $29 for Medicare. Having withheld about $353, he failed to remit the sum to the IRS. The penalty amount will be $353 and he will be made to also pay the amount he owed which is also $353.

That payment is a lot on an employee, but it could be staggering on multiple employees over a period of time.

What action will IRS take having assessed a TFRP?

In a situation where IRS feels an individual or a group has not been faithful to the payment of Trust Fund Taxes, IRS’s official will embark on assessment to discover those who are responsible. Multiple documents will also be requested during this assessment period coupled with a lot of information.

These documents could be canceled checks, bank statements and even information about who is in charge of management of passwords, login details for online accounts. The goal of this is to know who pays bills and controls money. The entire cash flow of money is also assessed.

Articles of business incorporation or partnership contracts will also be assessed to have an overview of power layout in the organization. Having come to a definite conclusion of parties involved, interview will be requested by IRS with the person.

What is TFRP Interview?

It does not matter whether you own the person or you were found responsible for missing not paying taxes, IRS can deem it fit to summon you. The interview is often referred to as Form 4180 interview. You can consult with your Tax Preparer to get detailed information about the interview and how to avoid it.

Settlement of the Penalty

There are options to settle TFRP just like other forms of tax debt. Payment plan can be applied for and you can sign up to pay in installment. The debt can also be settled for a lesser amount compared to the actual amount owed. This is only possible through a program called ‘Offer in Compromise’ or ‘ Partial payment installment agreement.

Every action has consequences.  You must always endeavor to weigh the consequences of not paying Trust Fund Taxes before you decide not to pay it.

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