What are Trust Fund Penalties?

Don’t Panic Note Meaning; No Panicking!

Are you a business owner that’s fallen on hard times?  Perhaps you’ve lost sales or have customers that can’t seem to pay you on time.  Is your bank balance falling as your costs are going through the roof?

When times get tough, owners may find themselves strapped for cash.  Many times, vendors aren’t paid based on importance.  Instead, the person yelling the loudest tends to get their check first.  

A common trap that business owners fall into is paying their employment taxes late.  Many owners do this with the best intentions – they plan to pay them, but something else pops up that seems to be more critical.  Before they know it, their tax debt is snowballing.  They are several weeks, even months, behind.  

Owners may justify this practice because they haven’t heard anything from the Internal Revenue Service.  It can’t be that big of a deal if they fall a little behind.

Think Again

The IRS considers it a serious matter when you don’t remit federal trust fund taxes. They will take all measures possible to collect from you.  That means they will charge you with high trust fund penalties. They can even come after you, and your employees, personally.  

If you don’t pay in federal trust fund taxes, you can be subject to criminal penalties.  Under Section 7202, any person who is obligated to collect, track, and remit federal trust funds taxes, and willfully fails to do so, can be imprisoned for up to 5 years, fined up to $10,000, or both.  Plus, you can be responsible for paying for the cost of prosecution.

If you are behind in making your payroll tax deposits, you need to get help now.  The longer you wait, the most it will cost you.

What are Trust Fund Taxes?

Trust fund taxes are what you withhold from your employees’ paychecks.  That  includes Federal withholding, Social Security, and Medicare.  

When you withhold taxes from an employee’s paychecks, you can’t use them to pay for something else.  You are obligated to send in these tax payments to the Internal Revenue Service on behalf of your employees.  When a business fails to do so, they are violating the deposit agreement with the IRS.If you don’t send federal trust fund tax payments when they are due, expect to be charged a Trust Fund Recovery Penalty (TFRP).   

High penalties:  The IRS will assess TFRP only on the amount that you withheld from an employee’s paycheck but didn’t remit.  That means, they penalize you on federal income tax and the amount of social security and Medicare withheld from an employee’s check.  

TFRP penalties are high.  They equal the total withheld from an employee’s check.  

For example, if you deducted $500 from your employee’s paycheck for taxes, your TFRP penalty is $500. You now owe $1,000 to the IRS.  

Trust fund penalties are not only among the highest penalties that the IRS may charge you, but they also reach beyond the business.  When you don’t pay in the taxes you withhold from an employee’s paycheck; the IRS will look to which individuals played a role.

Who is responsible?  What is willful? The IRS casts a wide net to include anyone who willfully fails to pay or collect trust fund taxes.   Managers, bookkeepers, check-signers, outside accountants, third-party payroll administrators, shareholders, and even members of the board can be held responsible.  If your spouse is a corporate officer, they can get dragged in to it as well.

If you know that you need to pay in your trust fund taxes and don’t do it, that falls under the “willful” category.  It can also include people who knew that employment taxes were not sent in, but they did nothing about it.

The IRS has one goal.  They want their money. 

And they will hold as many people accountable as they can until they get their money.

Even if the business is closed, the TFRP penalty will not go away. While they may be willing to waive the employer’s portion of employment taxes, the IRS will continue to pursue collection from the responsible parties. 

How does the IRS collect Trust Fund Recovery Penalties?  

If the IRS thinks your company is not sending in the trust fund tax payments, they will investigate.  Dealing with the IRS on trust fund matters is an arduous and stressful process.  

Documentation:  The IRS will ask for a lot of documents.  They may request bank statements and canceled checks.  The IRS will look at your corporate documents to see who owns the company.  

They may ask you for log-in credentials to your online banking and credit cards.  This request is not random – the IRS wants to know; 

  • Who pays the bills?
  • Who controls the money?
  • Who makes the financial decisions in the organization?

Why are they asking?  Ultimately, the IRS is trying to determine which parties are responsible for the trust fund taxes not being paid.  

Interview:  To complete this process, the IRS will interview anyone they feel is responsible for failing to pay trust funds taxes.  These interviews may include anyone with the ability to decide which bills to pay.  It may also include people who knew that employment taxes weren’t being paid and did nothing about it.  

The interview process can be brutal.  Often referred to as a Form 4180 interview, the agent asks a series of questions with the intent of determining not only if you were responsible, but to uncover others who were involved.  

You may be able to avoid an interview if you;

  • Pay the full amount of the tax due or make arrangements to repay the debt over the time allowed by the IRS.
  • Prove to the IRS that you were not responsible.
  • Show the IRS that you don’t have the financial means to repay the debt.  While this may not absolve you of liability, the IRS may focus their attention on the other parties involved.  After all, the IRS wants to get paid.   If you genuinely are unable to, they may not pursue you.
  • Make an arrangement: If you can’t pay the TFRP in full, having help to go over your options is recommended. With an experts assistance you could be eligible for an offer in compromise or an installment agreement depending on your current situation.

What to do if you have Trust Fund Recovery Penalties

If you can’t pay what you owe, speak to our counselors to find out what your options are.  Our team will evaluate your situation and can help you to find practical solutions to pay what you owe.  They can provide you with valuable information about tax debt relief programs that are available to you.

If you have fallen behind in trust fund taxes or have trust fund recovery penalties, you need to seek help immediately.  You may be able to duck the IRS for a while, but it will catch up to you.   Schedule your free consultation today and start taking control of your financial future.

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