The trust fund recovery penalty (TFRP) is a penalty imposed on individuals who are considered responsible for collecting and paying trust fund taxes but willfully fail to do so. This penalty can have serious consequences for small businesses and their owners, as it can result in personal liability for unpaid trust fund taxes. It is crucial for small business owners to understand the TFRP and take steps to avoid it. If you don’t know where to start, contact a qualified small business tax lawyer today.
What Are Trust Fund Taxes?
Small businesses have a responsibility to withhold and pay certain employment taxes on behalf of their employees, such as taxes for Social Security and Medicare, income taxes, and unemployment taxes. These are commonly called trust fund taxes.
Employers who have collected employment taxes are required to makes a federal tax deposit for things like payroll taxes and excise taxes, and failure to do so may result in personal liability for the responsible party. If a business or nonprofit organization willfully fails to pay the federal government, the Internal Revenue Service (IRS) can impose a penalty, known as the trust fund recovery penalty.
Understanding the Penalty for Unpaid Trust Fund Taxes
If a business fails to pay its trust fund and employment taxes, the IRS can assess the TFRP against responsible parties, which can include owners, officers, and certain employees. An IRS revenue officer can collect it from the personal assets of the responsible parties, including bank accounts and property.
Even worse, the TFRP is not dischargeable in bankruptcy and can have a significant impact on a business’s credit rating. In some cases, if the IRS decides there was intent to avoid paying payroll taxes, they may even pursue criminal charges against those who willfully fail to pay.
How the Trust Fund Recovery Penalty Works
Small business owners need to be aware that the trust fund recovery penalty can have serious consequences if not paid on time. This penalty includes the unpaid amount of the trust fund taxes, including employment taxes such as social security, Medicare, and income taxes, withheld from employees’ paychecks.
Who Is Responsible for Paying the Trust Fund Recovery Penalty?
The responsibility for paying TFRP falls on the person who is responsible for paying the collected taxes.
This can be an individual, such as a business owner, a common law employer, a corporate director, or a designated employee. If an individual exercised independent judgment when deciding not to pay trust fund taxes, they may be held responsible for the unpaid amount; other creditors may also be affected if a business fails to pay their taxes.
What Does the Trust Fund Recovery Penalty Cover?
TFRP covers several types of taxes, including federal income tax withheld from employee paychecks, payroll taxes like the employee’s social security and Medicare taxes, and the employer’s share of the same. It is important to note that TFRP only applies to the trust fund portion, not the employer’s share.
How Is the Trust Fund Recovery Penalty Calculated?
According to the Internal Revenue Code, the TFRP is calculated by taking the unpaid amount of the trust fund taxes and multiplying it by the current penalty rate, which can range from 10% to 100% of the tax that was not paid, depending on the severity of the violation.
The penalty is assessed on top of the unpaid payroll taxes, and the responsible person is personally liable for paying the penalty.
What Are the Consequences If TFRP Is Unpaid?
The consequences of failing to pay TFRP can be severe. The IRS can place a federal tax lien on the assets of the responsible person, including bank accounts and real estate, and can seize assets to pay the penalty. The IRS may also pursue legal action to collect the penalty, including seizing tax returns, wage garnishment, or a levy on the bank account of the responsible party.
How To Avoid the Trust Fund Recovery Penalty
To avoid the TFRP, business owners must be aware of their tax liabilities and avoid intentionally disregarding their obligation to pay, as they can be held personally liable for taxes that have not been paid, including trust funds. Fortunately, there are simple steps small businesses can take to avoid the TFRP.
Properly Remitting Unpaid Taxes
One of the most important steps small businesses can take to avoid the trust fund recovery penalty is to properly remit their taxes. This means accurately calculating and withholding the appropriate taxes from employees’ wages and other sources of income.
Small businesses should also make sure they are correctly identifying which taxes are subject to the TFRP, and ensuring that these taxes are paid in a timely manner.
Paying Your Taxes on Time
Another key factor in avoiding the TFRP is ensuring timely payment of taxes. Small businesses should be aware of the deadlines for remitting and paying taxes and make sure to meet these deadlines.
Systems to ensure that taxes are paid on time can help avoid late payments. For example, working with a third-party payer, such as payroll service providers (PSP), or professional employer organizations (PEO) can keep your tax payments on schedule.
Being Aware of Tax Issues and Seeking Professional Help
Small businesses should stay informed of changes in tax laws that could affect their obligations. It is also important to seek professional help when needed. Tax professionals can help small businesses navigate complex tax regulations and ensure that they are meeting all their obligations.
Making Sure Decision-Making Authority Is Aware of Tax Obligations
Finally, small businesses should ensure that decision-making authority is aware of their tax obligations and they are not intentionally disregarded. This means that key individuals, such as business owners and directors, should understand their responsibilities when it comes to taxes and be actively involved in ensuring that taxes are being properly remitted and paid on time.
By making tax compliance a priority at the highest level of the organization, small businesses can reduce the risk of TFRP penalties and other negative consequences.
Common Misconceptions About Trust Fund Recovery Penalties
Despite its significance for small businesses, many misconceptions surround TFRP. It is crucial to debunk these myths to avoid costly mistakes that can harm your business’s financial health.
TFRP Only Applies to Large Businesses
Many small businesses assume that TFRP only applies to large corporations. However, any business, regardless of size, that willfully fails to properly remit withheld taxes may be subject to TFRP. Therefore, it is essential to understand your business’s tax obligations and the consequences of failing to meet them.
TFRP Only Applies to Federal Income Taxes
Another common misconception is that TFRP only applies to federal income tax. However, TFRP covers any taxes withheld from employees’ paychecks, including Social Security and Medicare taxes. Failure to pay these taxes may result in TFRP.
The Business Owner Is the Only Responsible Person
Many small business owners assume that they are the only ones who can be held responsible for TFRP. However, the law holds anyone who has “willfully failed” to pay withheld taxes personally responsible for TFRP. This may include officers, directors, and even accountants or bookkeepers who have signature authority regarding the business’s tax obligations.
TFRP Can Be Discharged in Bankruptcy
Finally, some small business owners believe that TFRP can be discharged in bankruptcy. However, this is not the case, meaning that the debt will continue to follow you even after you file for bankruptcy.
Therefore, it is essential to take proactive measures to avoid TFRP. By understanding these common misconceptions about TFRP, small business owners can avoid costly mistakes that may harm their business’s financial stability.
Appealing a Trust Fund Recovery Penalty (TFRP) Assessment
If you believe that the TFRP assessment against you or your business is incorrect or unjust, you have the right to appeal it. Begin by filing a written protest with the IRS within 60 days of receiving the Notice and Demand for Payment. The protest should include the specific reasons why you believe the assessment is incorrect, and any supporting documents.
Reasons for Appealing a TFRP Assessment
There are several reasons why you may want to appeal a TFRP assessment. For example, you may believe that the assessment is based on incorrect information or that you were not responsible for the unpaid taxes because of your tax group.
You may also have evidence that the IRS did not consider when making the assessment. In any case, it is important to provide as much supporting evidence as possible to strengthen your appeal.
How To Prepare for an Appeals Conference
Once you have filed your protest, the IRS will schedule an appeals conference to review your case. It is important to prepare for the conference by gathering all relevant documents, including any correspondence with the IRS and any documentation supporting your position.
You may also want to consult with a tax attorney or professional who can provide guidance and representation throughout the appeals process. At the conference, you will have the opportunity to present your case and provide evidence to support your position. After the conference, the IRS will issue a written determination that either affirms, modifies, or reverses the TFRP assessment.
Trust fund recovery penalties can be a significant burden for small businesses. If you’ve gotten in trouble with the IRS, seeking the guidance of a qualified tax professional can help you deal with penalties and complex tax obligations to ensure the financial stability and success of your small business.