An employer is required to withhold federal income and payroll taxes from its employees’ wages for payment to the IRS. Payroll taxes such as federal income taxes and FICA (Federal Insurance Contributions Act) taxes, both withheld by an employer, are held in trust until the employer makes a federal deposit of these amounts. The IRS applies a term, “Trust Fund Recovery Penalty” or TFRP, well-known by employers, to describe the fine for employer’s willful failure to remit payroll taxes.
I.R.C. § 6672(a) provides that:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
Thus, under the above general rule, any person required to collect, truthfully account for, and pay over any tax imposed by the code who willfully fails to do so, will, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax not collected and paid over.
For the IRS to assess a TFRP, two tests must be applied. One involves determining the responsible person and the second determines whether this person, if deemed responsible under the first test, willfully failed to make the required payment. The Internal Revenue Code, specifically I.R.C. §6672, allows the IRS to pierce the corporate veil and proceed against any person who is responsible for the corporation’s failure to deposit payroll or trust fund taxes. Also, a failure to pay payroll taxes is willful if it is a voluntary, conscious, and intentional, as opposed to an accidental, i.e., negligent act. To be willful, an individual must either know of or recklessly disregard due payment.
Payroll taxes generate an enormous amount of revenue, as do trust fund recovery penalties, thus the IRS is especially aggressive in enforcing the payment of payroll taxes through the trust fund penalty. Unpaid payroll taxes and trust fund recovery penalties add up quickly, especially for larger businesses and can drive them from existence, especially since they are not dischargeable in bankruptcy.
But significantly more concerning is that the failure to pay payroll/trust fund taxes brings with it the possibility of criminal charges. Pursuant to I.R.C. §7202, a willful failure to pay over or collect tax is a felony punishable by up to a $10,000 fine or five years in prison, or both. In a typical criminal prosecution for failure to pay, the responsible person is usually sentenced to some time in prison and required to pay restitution. Any person deemed a responsible person under I.R.C. §6672 can be criminally liable under I.R.C. §7202.
However, the IRS generally reserves criminal charges for the scenario where a responsible person owned the business and diverted the money for personal use, rather than where a responsible person was coping with a struggling business and in good faith prioritized payments to other creditors all in the hope of perpetuating the business enterprise.
If you have are an employer, especially one facing financial difficulty, and have questions or concerns about payroll taxes and/or the trust fund recovery penalty, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
