Are you a business owner with employees? Did you know that you have a duty to collect, truthfully account for and pay over your employees’ withheld income tax and their portion of FICA? If you fail to do so, you could be personally subject to a 100% penalty known as the Trust Fund Recovery Penalty (TFRP). Scary, right?
Found in Internal Revenue Code Section 6672, the Trust Fund Recovery Penalty is not a new penalty, but the IRS has been increasing enforcement and litigation related to TFRP over the past couple years. In essence, TFRP applies to any person who has the responsibility to “collect, truthfully account for and pay over any tax” and who willfully fails to complete any of the three listed responsibilities.
This penalty is so severe because you are responsible for holding other people’s money in trust, and this money is owed to the government. The government views willful failure to pay these withheld taxes as stealing. TFRP is a civil enforcement tool to collect these funds and discourage noncompliance.
So, I’m sure you’re asking, “What does TFRP apply to, and how can I avoid it?”
Only amounts withheld from an employee – such as withheld income tax, employees’ portion of FICA, and/or levies and excise taxes – apply, and the person liable for them is any “responsible person.” You are considered a “responsible person” by the IRS regarding these withholdings, even if you are responsible for only one of the three duties mentioned above. All responsible persons are jointly and severally liable for any unremitted payroll tax withholdings.
Additionally, the IRS may go after you directly without going after the business first, which is where TFRPs comes into play. TFRPs are applied directly against you personally. If any of the aforementioned responsibilities are found to have been willfully not upheld, you will owe the 100% penalty for those amounts.
If the IRS determines that any payroll tax withholdings have not been collected, truthfully accounted for and/or paid over, the burden to prove the lack of willfulness is on the responsible person(s), meaning you as the business owner. Willfulness means the act of not remitting the funds was “voluntarily, consciously, and intentionally done or omitted.” Unlike with other tax issues, good faith and bad motive are irrelevant when determining willfulness. Instead, willfulness is typically determined by showing a conscious preference of one creditor over the federal government or by failing to separate withholdings from other corporate assets.
What does that mean? In simplest terms, the buck stops here. Even if you are unintentionally failing to remit the payments and instead depending on another person to do so and they fail in that duty, you are liable. For example, if you have an employee responsible for submitting payroll returns and payments, as the business owner, you are responsible for making sure the payments are actually sent. Further, you are liable for payments, even when using a third-party payroll service.
What can you do avoid TFRP?
1. Keep accurate records of your employees’ withholdings, submit your payroll tax returns on time, and make the full payments on time.
2. Set up an EFTPS account to monitor deposits, sign up for email notifications, and be proactive about notifying your payroll specialist or third-party payroll service provider when you notice missing or inaccurate tax deposits.
3. Submit missing or inaccurate payments as soon as possible along with a voluntary disclosure to mitigate any TFRPs.
By Amanda McBride
- This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.