Employers are required to withhold federal income and payroll taxes from their employees’ wages for payment of payroll taxes such as federal income taxes and FICA (Federal Insurance Contributions Act) taxes. Such taxes are held in trust by an employer until it makes a federal deposit of the due amounts.
The IRS applies a term, “Trust Fund Recovery Penalty” (TFRP), for the fine related to an employer’s willful failure to pay over necessary federal income and FICA taxes. “Responsible persons” making such payments may be subject to criminal charges for any willful failure to remit these taxes. Most TFRP cases involve corporate officers and companies that are no longer in business, in which case the IRS may only collect TFRP from “responsible persons.”
Thus, the TFRP may be utilized to assert liability against the non-owner of a business that exercises control over a company’s financial operations. It is unnecessary for the IRS to assert the “responsible person” rules under § 6672 against the owner of a sole proprietorship because the individual owner is personally liable for employment taxes under IRC §§ 3101, 3402, and 3403.
Regardless of a person’s level of involvement with a corporate business, a person will not be held liable for the TFRP unless obligated pursuant to a duty to account for, collect, and pay over the trust fund taxes to the appropriate taxing authority when due. Thus, even an officer of a corporation or managing member of an LLC will not be a responsible person if they hold title in name only and have no substantive duties operating the business. O’Connor v. United States, 956 F.2d 48 (4th Cir. 1992). It is important to remember that anyone without a corporate title that, in fact, controls the financial affairs of a business may be held responsible for the TFRP.
The failure to pay payroll/trust fund taxes also presents the potential for criminal liability. Under 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 many criminal prosecutions for failure to pay, the responsible person is sentenced to some jail time and required to pay restitution.
Any person deemed a responsible person under I.R.C. §6672 may be criminally liable under I.R.C. §7202. If you are a “responsible person,” you must understand all of your legal duties and obligation under the federal tax laws. Otherwise, the consequences may be severe and even result in jail time.
Because the IRS aggressively enforces the TFRP, there are some other important facts for business owners to know:
- The obligation to pay trust fund recovery penalties may not be discharged in bankruptcy.
- The IRS may collect the penalty contemporaneously from the business itself and all responsible persons until the liability is paid in full.
- For individuals found liable for TFRP, while the IRS may demand the entire balance from them, they may be able to seek contribution from other responsible persons.
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.
