The Trust Fund Recovery Penalty

Episode 36:  In this episode, Timalyn continues with a topic related to payroll taxes.  Today, she’ll discuss the Trust Fund Recovery Penalty.  It’s one of the biggest tax penalties the IRS can use.  The penalty can be up to 100% of the taxes owed.  Does she have your attention yet?  Let’s listen to Timalyn discuss how to avoid this penalty.

In episode 28, Timalyn discussed the IRS Accuracy-Related Penalty.  This penalty can be 20% of the miscalculated tax.  That seems like a big deal until you learn about the Trust Fund Recovery Penalty, which can be up to 100% of the unpaid taxes.  Additionally, there’s no cap on the amount eligible for the penalty.

The Trust Fund Recovery Penalty can be assessed to the business, but also to people the IRS deems responsible for the payroll taxes not being paid.   This extends to people that may not even be the owner of the business.  You may still be held responsible according to the IRS’ rules. 

What Is the Trust Fund Recovery Penalty?

Timalyn explains the trust fund is the taxes withheld by the employer, on behalf of the employee.  Each private-sector employee has submitted a form W-4 instructing how much should be withheld for income taxes. In addition to those taxes money Social Security and Medicare tax (FICA) are also withheld from wages.  Those withheld funds are held in a  “trust.” 

As previously stated, the Trust Fund Recovery Penalty is 100% of the trust fund tax.  This is the employee’s portion of FICA and the income tax withheld.  The employer is required to submit those funds to the IRS.  If the employer willfully neglects to submit these fund, they are evading taxes.  This is significantly different from avoiding taxes.  Timalyn focuses on the important distinction between tax evasion and tax avoidance in Episode 34.

How Long Does the IRS Have to Assess the Penalty?

The IRS has 3 years to assess the Trust Fund Recovery Penalty.  If you haven’t made an arrangement to pay those taxes, you need to address it ASAP.  The IRS actually has 10 years to collect the taxes.  Refer to Episode 5 for an explanation of the Collection Statute Expiration Date (“CSED”).  This date is established, once the penalty has been assessed.

As stated in Episode 35, payroll tax penalties can be charged as civil penalties or as criminal charges.  So, beyond the financial aspects, there’s also a risk of incarceration if you’re found to have willfully not collect or didn’t truthfully calculate the taxes. 

Why Is the Trust Fund Recovery Penalty so Harsh?

The answer is two-fold.  First, if this penalty applies, you’ve been a tax evader.  Second, if you haven’t paid the taxes withheld from the employee, the IRS also considers you a thief.  You’ve stolen funds from your employee and the IRS.

Because you didn’t pay the taxes withheld, the employee won’t receive the benefit of the tax payments they thought were lawfully paid.  If there’s a tax refund, the IRS is coming after you because now they’ve paid out money that was never paid to them in the first place. 

Additional Penalties Can Be Assessed

Before assessing the TFRP the IRS will assess other penalties as well. They will still assess you with the failure to deposit penalty and the failure to file penalty if you didn’t file the proper payroll returns. Once the IRS adds the TFRP on top of that it can cause a serious financial leak in your business, possibly resulting in you closing.

If you’re exposed to payroll tax penalties, including the TFRP, you need to communicate with the IRS.  Don’t let the problem grow worse.  Timalyn explains that communication is key.  The IRS may be willing to work with you.   

Who Can Be Held Responsible?

At the beginning of the episode, Timalyn mentioned the penalty can be assessed to more individuals than just the business owner.  Any person responsible for withholding, accounting for, depositing or paying specified taxes – and willfully failing to do so.

The above scenario could include the company treasurer, an accountant, an officer, director, shareholder, or even a bookkeeper.  If you have an employee responsible for payroll activities or anyone who has signing authority on certain checking accounts.

Any or all of them can be assessed the Trust Fund Recovery Penalty.  Remember this is 100% of the unpaid withholdings. Imagine how financially devastating this could be. 

Can I Get the IRS Trust Fund Recovery Penalty Removed?

Yes.  If the IRS deems you were not responsible for the negligence.  There will be interviews and required proof, but it may be possible.  However, penalty abatement with payroll taxes can be very complicated.

If you’re involved in this type of situation, Timalyn highly recommends hiring a tax professional to represent you.  She explains tax representation in Episode 33.  That episode also has a link to help you decide on which kind of tax professional might be best for you.

You can book a consultation with Timalyn to review and discuss options related to your specific situation. 

A point to remember, it will probably be best for you to hire a separate tax professional to represent you, instead of trying to have the same professional represent the business and all impacted parties.  There could be a potential conflict of interest.  You want to make sure someone is representing your best interest.  It’s important that you get the help you need to address this situation, before it gets any worse.

Please consider sharing this episode with your friends and family.  There are many people dealing with tax issues, and you may not know about it.  This information might be helpful to someone who really needs it.  After all, back taxes shouldn’t ruin their life either.

As we conclude Episode 36, we encourage you to connect with Timalyn on social media. You’ll be able to subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts, and many other podcast platforms.   

Remember, Timalyn Bowens is America’s Favorite EA and she’s here to fill the tax literacy gap, one taxpayer at a time.  Thanks for listening to today’s episode. 

For more information about tax relief options, visit https://www.Bowenstaxsolutions.com/ .

If you have any feedback, or suggestions for an upcoming episode topic, please submit them here:  https://www.americasfavoriteea.com/contact.

Disclaimer:  This podcast is for informational and educational purposes only.  It provides a framework and possible solutions for solving your tax problems, but it is not legally binding.  Please consult your tax professional regarding your specific tax situation.