Payroll Employment Tax Problems

Trust Fund Recovery Penalty

Income taxes withheld from your employee's paychecks and the employee's portion of the Social Security and Medicare taxes are called Trust Fund taxes because the employer actually holds the employee’s withheld taxes or the collected excise taxes in trust until the employer makes a federal tax deposit in the amount of the withheld or collected taxes.

The IRS may assess this penalty against a responsible person whether or not the company is still in business.

You may be assessed this penalty either because you failed to to remit the required taxes withheld from your employees checks, or because the IRS has claimed that you misclassified employees as Independent Contractors.

The IRS will assess this penalty on persons they deem to be a "Responsible Person".  A responsible person is an individual(s) who had the duty to perform and the power to direct the collection and payment of trust fund taxes. A responsible person may be an officer or an employee of a corporation, a member or employee of a partnership, a corporate director or shareholder, a member of a board of directors of a nonprofit organization, or
another person with authority and power to direct the disbursement of funds.

The IRS may assess the penalty against anyone who is responsible for collecting and paying withheld income and employment taxes, or for paying collected excise taxes, and who willfully fails to collect and pay them.

The IRS considers it to be willful if the responsible person knew about the unpaid taxes, and used the withheld or collected funds to keep the business going, allowed available funds to be paid to other creditors other than the IRS, or otherwise failed to pay the taxes to the IRS.

Criminal penalties can also be imposed.

The amount of the penalty is equal to the unpaid balance of the trust fund taxes. This is why it is sometimes refereed to as the 100% penalty.  The penalty is computed based on the unpaid income taxes that should have been withheld, or were withheld but not paid, plus the employee’s portion of the Social Security and Medicare taxes that should have been withheld, or were withheld but not paid.

Our enrolled agent will advise you on the best course of action.