IRS Trust Fund Tax Basics
What is the Trust Fund Recovery Penalty?The Trust Fund Recovery Penalty (TFRP), often shortened to just Trust Fund, originates from a business employment tax liability. It is the portion of the back payroll tax that can be assessed to and collected from the individual owners, officers, etc. of the business. It pierces the so called "corporate veil" to reach the individual owners and sometimes non-owner employees of the delinquent business.
A business's 941 employment tax liability consists of tax, penalties and interest. The Trust Fund is a portion of the total tax component. It includes the taxes that were to be taken out of employee's paychecks and paid over to the IRS - the employee's income tax withholding, and Social Security and Medicare contribution.
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How Does the IRS Collect the TFRP?The delinquent business is the first collection source considered for the Trust Fund tax. Since the business is the taxpayer that accrued the employment tax, which includes the Trust Fund, the Service will look to collect the total tax liability from the business as quickly as possible. If it is unable to collect from the business relatively quickly, the Service will look to collect the TFRP from the Responsible Individuals of the business.
The IRS has the power to collect the Trust Fund tax from several sources simultaneously, including the business and any individuals found to be Responsible and Willful for collecting the Trust tax and handing it over to the IRS.
Who Can Be Held Personally Responsible for the Business Trust Fund Tax?The IRS will look at owners, officers, shareholders, members, managers, bookkeepers, accountants, employees and other individuals or entities that may be connected to the business's financial decisions.
2 criteria must be met for assessment of the Trust Fund Recovery Penalty to an individual:
Responsible - must be responsible for collecting, accounting for and transferring the Trust Fund taxes to the IRS.
Willful - "intentional", "deliberate" and "voluntary" are all words used by the IRS to describe Willfulness. Compared to Responsibility, lack of Willfulness is much more difficult to prove. This is especially true if you've already been proven to be Responsible. For the purpose of the IRS Trust Fund tax, Willfulness means that you should have been aware and may mean that the person was simply indifferent regarding collection and payment of the tax.
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