Trust Fund Recovery Penalties: How Can I Avoid Liability?

The Internal Revenue Service (IRS) is serious about getting its money, and one of the things that it will go after is the employment taxes that are owed. Companies need to be sure that there is a method in place to calculate and withhold employee payroll taxes or risk being audited by the IRS. In order to encourage the prompt payment of withheld taxes to the IRS, they developed the Trust Fund Recovery Penalty (TFRP).

Determining Responsibility for Tax Payment

The TFRP works by holding employers accountable for outstanding amounts of income and FICA taxes that are not paid to the federal government, to the full amount. The penalty is calculated by adding the amount of the income taxes that were withheld with the employee's portion of the withheld taxes.

The person that can be held responsible for repayment of these amounts include:

  • The person that is responsible for collecting employment taxes; OR
  • The person in charge or paying collected excise taxes; AND
  • Willfully fails to collect or pay the taxes.

In addition, liability for repayment, or failure to repay, is based on the individual's duty and power in collecting, accounting, and paying of trust fund taxes. The amount of liability anyone has can be determined by discovering their level of independent judgment in respect to the business. For example, an employee may not be held responsible for the TFRP if their job was solely to pay bills as directed by another person, and does not involve deciding which creditors to pay.

Key to being held liable is the intent to withhold the taxes. This can be proven by showing that the responsible party was aware of the outstanding tax amount and was either indifferent to the law or completely disregarded the need to send in the collected taxes.

In order to avoid TFRP, the person in charge of repaying money to the federal government should be sure that all taxes that to be sent to the IRS are collected, placed in a trust, and paid out. In addition, making tax deposits and payments on time can prevent the TFRP.

If you have questions about your involvement in a business and how you may be affected by the TFRP, contact the Palm Beach County tax attorneys at The Law Office of Michael K. Miller.


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