A trust fund recovery penalty (TRFP) describes the penalty you face (as an employer, CEO, or any other role that allows you to withhold income from employees) if you fail to send money to the IRS that was withheld from employee paychecks for income tax, social security, and/or Medicare payments. Trust fund recovery penalties are the largest penalties charged by the IRS and cannot be discharged in bankruptcy, which means it’s not something to be taken lightly. If this happens to you, the IRS could seize your assets to retrieve the money they are owed. Here we will go over exactly what to do to ensure things turn out in your favor.
1) Understand the Penalty and Your Role in the Business
These “trust fund” taxes get their name from employees that trust their employers to send their collected tax funds to the government on their behalf. The person or people ultimately held responsible for a failure to send these funds to the IRS could include employers, owners, CEOs, directors, employees, third party payroll administrators, accountants, and bookkeepers. Shareholders can also be held responsible (if the business is a corporation), as can members of the board of trustees (if the business is a non-profit).
Even if you are not explicitly involved in collecting these taxes, you could still be held accountable. For example, if you were aware that the taxes were being collected and not being paid to the IRS, you will be held liable. To prove that an individual is subject to the penalty, the IRS must show that the person was 1) Aware that the taxes were due, and 2) Aware that they weren’t being paid. In order to be charged with the penalty, the person in question must have purposefully or willfully ignored the law.
2) Be Prepared
You need to make sure you’re prepared. This is where IRS help services come in. If you are concerned that you may be held accountable for a trust fund recovery penalty, reach out to these services for help. The penalty process can be complex and experts know how the system works and how to help you get through it.
Look out for a request from the IRS for extensive documentation and background information. Documents can include bank statements, canceled checks, details about passwords for online accounts and PINs for bank cards. You may be required to explain who in the company knows which passwords for which accounts. The IRS will be interested in seeing which employers or employees are responsible for paying the bills, who has control over the finances in general, and where any collected tax money goes.
The IRS will also likely make requests for any partnership contracts to determine how the power is distributed in the company, as well as job descriptions. If or when an IRS agent suspects an individual or party to be responsible, the IRS will request an interview or a series of interviews.
3) Know Your Options for a Trust Fund Recovery Penalty
If you are involved with a company involved in a TFRP, you have a couple of options. If you are an employee and can prove that you were unaware that payroll taxes were not being paid to the IRS, you can claim what is called a willfulness defense. You also have three specific “appeal” rights: 1) The right to appeal if requested within 60 days, 2) The right to have an authorized representative (i.e. an attorney) to accompany you during the appeal process, and 3) The right to have a court review the assessment in the event you disagree with the IRS Appeals decision.
When facing a trust fund recovery penalty, it’s always a good idea to consult with a professional. They can help you make sense of the situation, your role in it, and how to proceed with the penalty you’re facing. When facing a game you don’t know the ins and outs of, it’s always best to have an expert on your team.