Employers must deduct taxes from
their employees’ wages. Employers must make tax deposits and payments on time or they are subject to a Trust Fund Recovery Penalty (“TFRP”). To avoid the TFRP, employers must make sure that all employment taxes are collected, accounted for, and paid to the IRS when required . There are three parts or types of payroll or employment taxes withheld from the employee and reported on form 941, filed quarterly:
1) Federal Withholding – Taxes withheld from the employees’ wages by the employer and paid to the IRS.
2) Employee FICA – Social Security and Medicare taxes withheld from the employees’ wages by the employer and paid to the IRS. The FICA amount is 7.65% of each employee’s wages.
3) Employer FICA – Social Security and Medicare taxes paid by the employer. The employer will pay 7.65% of the employees’ wages.
Congress enacted §6672 of the Internal Revenue Code in 1954 to encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes. Because the employer holds the employee’s money in trust until it makes a federal tax deposit in that amount, these are known as trust fund taxes. It applies and may be assessed even to a business that has stopped operating. The “Trust Fund Recovery Penalty” of § 6672 doesn’t just apply to the business entity but may also apply to individuals like a corporate officer or member of a partnership if these unpaid employment or trust fund taxes cannot be immediately collected from the business.
The Trust Fund Recovery Penalty may be assessed against any person who Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and willfully fails to collect or pay them. A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:
- An officer or an employee of a corporation,
- A member or employee of a partnership,
- A corporate director or shareholder,
- A member of a board of trustees of a nonprofit organization,
- Another person with authority and control over funds to direct their disbursement,
- Another corporation or third party payer,
- Payroll Service Providers (PSP) or responsible parties within a PSP
- Professional Employer Organizations (PEO) or responsible parties within a PEO, or
- Responsible parties within the common law employer (client of PSP/PEO).
For “willfulness” to exist, the responsible person must have been, or should have been, aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. To hold an individual liable for the TFRP, no showing of evil intent or bad motive is required.
Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness. An employee is not a responsible person if the employee’s function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid.
If the IRS determines that you are a responsible person, it will provide you a letter stating that it plans to assess the TFRP against you and explain your rights of appeal. You have 60 days (75 days if the letter is addressed to a recipient outside the United States) from the date of this letter to appeal the IRS’ proposed course of action against you. If you do not respond to the letter sent by the IRS within the requisite time period, it will assess the penalty against you and send you a Notice and Demand for Payment. Once assessed a TFRP may start accruing interest.
The TFRP equals the Trust Fund Portion (“TFP”) of business payroll taxes. The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on the unpaid income taxes withheld, plus the employee’s portion of the withheld FICA taxes. For collected taxes, the penalty is based on the unpaid amount of collected excise taxes. This includes only Federal Withholding and Employee FICA, but does not include Employer FICA.
The amount of trust fund liability is typically substantially less than amount due from employer because the trust fund tax liability does not include the social security amounts matched by the employer; Form 940, FUTA tax; late deposit penalties; late payment penalties; or interest (accrued against the employer on tax and penalties before assessment of the trust fund recovery penalty). Once the IRS asserts the penalty, it can take collection action against your personal assets. It can file a federal tax lien or take levy or seizure action.
If you have or are an employer in the New York State and have questions about trust fund recovery penalties, call the tax experts at Thorgood Law Firm www.thorgoodlaw.com For a FREE consultation, call 212-490-0704.
