If you are a business owner or individual responsible for collecting payroll taxes, you are almost assuredly aware of the requirement to submit withheld funds to the IRS. While the responsibility to pay is obvious, do you have a clear understanding of the consequences of failing to comply?
The Trust Fund Recovery Penalty
Payroll taxes; two dreaded words for small businesses everywhere. While it would be nice to close your eyes, clap twice, and have them disappear, tax authorities won’t allow it. As a business owner, you are required to submit payroll taxes – which usually means withholding funds from your employees’ paychecks. To keep you in line, the IRS has instituted the Trust Fund Recovery Penalty (TFRP).
The IRS can assess a penalty for companies that don’t follow the rules. Specifically, the TFRP can be assessed against any individual who “is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes” and “willfully fails to collect or pay them.”
In laymen’s terms, any individual that’s responsible for collecting trust fund/payroll taxes and does not collect or pay them is susceptible to penalization. This individual could wear any number of hats, including officer or employee of a corporation, director, shareholder, member of the board of trustees, third party payer, payroll service provider, professional employer organization, or any other party responsible for payment.
In addition to being responsible for collecting and paying payroll taxes, it must be proven that the party willfully failed to collect and pay. This requires that there was a clear understanding of outstanding taxes and the responsibility to pay was intentionally disregarded. The IRS points out that “no evil intent or bad motive is required” under this condition.
The TFRP Penalty Amount
The TFRP penalty amount is determined based upon the unpaid balance of the trust fund tax – which includes unpaid income taxes withheld plus the employee’s portion of withheld FICA taxes.
Once the IRS determines responsibility and sends a letter stating its intention to assess the TFRP penalty, the responsible party has 60 days to respond with an appeal. If no appeal is submitted, the IRS will assess the penalty via a Notice and Demand for Payment. At this point, the IRS can launch a total collection action against personal assets (federal tax lien, levy, seizure claim, etc.).
How to Avoid the TFRP
Sounds pretty scary, doesn’t it? If you want to avoid the trust fund recovery penalty and remain in business, you must stay proactive. The IRS takes payroll taxes very seriously and your refusal to pay will have them beating down your door in no time. Here are a few tips for avoiding the frightening TFRP:
- Stay current. Most importantly, you need to stay on top of your payroll accounting. Get current with all employment tax returns and 941’s, even if paying them in full is impossible. By filing your 941’s, you can at least show the IRS you are attempting to remain compliant. They deal much more kindly with business owners that make an effort, as opposed to ones that pay total disregard to their rules and regulations.
- Start fresh. As a business owner, you certainly understand the importance of leaving the past in the past and focusing on the present. That skill will come in handy if you are confronted with the possibility of a TFRP. Regardless of how much past payroll tax you owe, start with the current month’s deposits and work from there. Again, the IRS takes notice of these small details.
- Statute of limitations. According to the Trust Fund Recovery Penalty Statute of Limitations, the IRS has exactly three years to notify you of delinquent trust fund taxes. After this point, you are off the hook. While these situations rarely slip by the watchful eyes of the IRS, it’s at least worth knowing.
- Negotiate. When you know you’ve messed up, it never hurts to negotiate. As a rule of thumb, “always under-promise and over deliver when you make a commitment” to the IRS. If you cooperate, it’s entirely possible they will work with you instead of imposing the TFRP.
- Be honest. Above all else, it’s incredibly important to be honest and transparent. The IRS is willing to work with you if they feel like you’re sincere. Never lie to the IRS and always provide information when you have it.
For help understanding the trust fund recovery penalty or negotiating with the internal revenue system, seek the assistance of an IRS tax professional. Their expertise and knowledge can improve your chances of remaining in the good graces of the IRS.