Certain federal taxes are deposited into a trust fund once they are collected, including:
- Federal income taxes
- Social Security taxes
- Medicare taxes
Businesses must withhold these taxes from an employee’s paycheck and send them to the IRS. The timing of the deposit depends on how much in payroll taxes a business pays. If your business has over $50,000 in payroll taxes, you will pay these to the IRS on a semiweekly schedule (you pay the IRS monthly if your payroll tax obligation is less than $50,000).
If these taxes go unpaid, the IRS may impose a trust fund recovery penalty that is applied to the unpaid amount. This penalty can be as much as 100% of the amount of taxes that were owed. The penalty applies only to the money that goes into a trust fund and not to business taxes that are unpaid (which have their own penalties). Accordingly, you can be facing serious jeopardy when the IRS determines that you played a role in the failure to pay these taxes.
A Trust Fund Recovery Penalty allows the IRS to hold individuals personally liable for unpaid payroll taxes, making it critical to consult a Trust Fund Recovery Penalty attorney in New York City as early as possible.
The IRS May Come After You Personally
Unlike other business penalties, trust fund recovery penalties can be assessed against individuals. The IRS can not only come after a business for the failure to pay these taxes, but they can also take action personally against a number of corporate executives and employees. You may even have to pay money to the IRS out of your own pocket to satisfy the back taxes and penalties, making it an even more financially perilous situation.
Specifically, the IRS can come after “responsible persons” for unpaid trust fund taxes and the associated penalties. There are many people who may fall under this category. Responsible parties could include corporate executives who provide overall direction to the company, such as the CEO or chief financial officer. Even lower-level employees may be included in this category if they had something to do with the failure to pay the taxes to the trust fund. For example, accounting professionals and bookkeepers could even end up being personally liable from their own pocket.
The IRS will consider the following factors in determining whether an employee is a “responsible person:”
- Authority to sign checks or make payroll decisions
- Ability to direct the use of company funds
- Knowledge that taxes were unpaid
The IRS will reach a determination of who is a responsible person after conducting a complete investigation of the facts and circumstances of the situation. The agency may conduct interviews and review bank statements to determine who had the responsibility for the failure to pay. Before deciding to impose a penalty, the agency will consider whether there was any sort of intentional action or willful neglect. The IRS may not impose a penalty if the failure to pay was the result of carelessness or an oversight. However, the IRS may impose a direct penalty if it finds evidence of the following:
- Any attempts to evade tax obligations
- Someone is benefiting personally from the failure to deposit the money with the IRS
- Payments were deliberately deprioritized in favor of other money that the business owed
There are drastic consequences if you are deemed to be a responsible person for the unpaid trust fund taxes. Then, you are liable for the full amount of the unpaid taxes, along with the interest and the steep penalties. Your liability is personal, meaning that you are expected to pay the money out of your own pocket if the business does not have the funds to cover the tax debt. Like any tax debt to the IRS, the agency can take enforcement action against you directly to recover the money that is owed. The IRS can place liens on your personal property, and they can seize your bank accounts. Your credit and ability to start a future business can be at grave risk.
Defenses for Potentially Responsible Persons for Unpaid Trust Fund Taxes
The IRS is rarely in a mood to negotiate when it comes to unpaid trust fund tax penalties, so you may be left with little option other than to mount the most vigorous legal defense possible. Here, you should engage a New York tax defense lawyer as soon as possible to ensure that your legal rights are fully protected.
There are several ways that you may be able to challenge the IRS’s finding that you may be personally responsible for the taxes:
- You can argue that you relied on the advice of a professional for whatever actions you took. In essence, you are admitting that you had something to do with not paying the taxes, but you listened in good faith to what your accountant or attorney at the time told you.
- You can claim that you were not a responsible person, insofar as you were not responsible for any actions that resulted in the non-payment of taxes, or that you did not exercise any decision-making control in the situation.
- You can claim that there was no willfulness involved in your actions, and you made good-faith efforts to pay the taxes as they were due.
The IRS maintains an office that handles appeals of trust fund recovery penalties. If you are unsuccessful in challenging the penalties at the IRS level, you can take your case to the U.S. Tax Court.
Hiring a tax defense lawyer early in the process can increase the chances that you could obtain the best possible result in your case. Your lawyer could engage with the IRS, presenting your side of the story in an attempt to avoid a penalty. Depending on the circumstances, they may even work out a resolution with the IRS (although the agency may not want to negotiate in egregious cases).
Contact a New York Tax Defense Lawyer
If the IRS is pursuing a Trust Fund Recovery Penalty, your personal and business finances could be at serious risk. At The Thorgood Law Firm, our New York tax defense lawyers defend responsible persons against TFRP claims. We review your case, identify defenses, and negotiate with the IRS to minimize or eliminate liability. Contact The Thorgood Law Firm today through our website or by calling us at (212) 490-0704 to protect your personal assets and get trusted guidance through this complex tax challenge. We offer free consultations.
FAQ Section
What is the Trust Fund Recovery Penalty (TFRP)?
The Trust Fund Recovery Penalty (TFRP) is a penalty imposed by the IRS on individuals responsible for failing to pay certain withheld payroll taxes. It can equal up to 100% of the unpaid trust fund taxes, including federal income tax, Social Security, and Medicare taxes.
What taxes are considered “trust fund taxes”?
Trust fund taxes include federal income taxes, Social Security taxes, and Medicare taxes that are withheld from employees’ paychecks and must be remitted to the IRS by the employer.
Who can be held personally liable for unpaid trust fund taxes?
The IRS can hold “responsible persons” personally liable. This may include business owners, corporate officers, executives, accountants, bookkeepers, or any employee with authority over financial decisions or payroll.
How does the IRS determine a “responsible person”?
The IRS evaluates several factors, including whether the individual had authority to sign checks, control company finances, make payroll decisions, or knew that the taxes were not being paid.
What does “willfulness” mean in TFRP cases?
Willfulness generally means that the responsible person knew (or should have known) about the unpaid taxes and intentionally disregarded the obligation to pay them, such as prioritizing other expenses over tax payments.
What are the consequences of a Trust Fund Recovery Penalty?
If assessed, the IRS can pursue collection actions against you personally, including placing liens on property, levying bank accounts, and damaging your credit. You may be required to pay the debt out of your own pocket.
Can I challenge a Trust Fund Recovery Penalty?
Yes. You may challenge the penalty by arguing that you were not a responsible person, lacked willfulness, or relied in good faith on professional advice. Appeals can be made within the IRS and, if necessary, in the U.S. Tax Court.
Can the IRS negotiate or reduce a TFRP?
The IRS is often strict with TFRP cases, but in some situations, a tax attorney may be able to negotiate or present defenses that reduce or eliminate liability depending on the facts.
Why should I hire a tax defense lawyer for a TFRP case?
A tax defense lawyer can protect your rights, communicate with the IRS on your behalf, develop legal defenses, and work to minimize or eliminate your personal liability.