Summary of The Trust Fund Recovery Penalty
Many businesses will inevitably face financial problems. The individuals in charge may decide to use payroll tax withholding taxes to pay the bills. These people believe that their fortunes will improve and that they are just borrowing the withholding taxes for a brief time. Unfortunately, for many their businesses will not improve and unpaid employment taxes will continue to grow. The Internal Revenue Service takes a dim view on the nonpayment of payroll taxes. It is seen as a taking of other’s money that has been entrusted to you. Is is more serious to the IRS than the non-payment of income taxes.
Consequently, the IRS has a way to collect a large portion of non-paid payroll taxes from anyone considered a “responsible person.” A responsible person is someone who is responsible for collecting or paying withheld income and employment taxes and willfully fails to collect them. A responsible person may be an: a) officer, partner, member, director, owner, or employee of the company; b) a person with authority and control over funds to direct their disbursement; c) third-party payors; d) any others who have the duty to perform and the power to direct the collection, accounting, and paying of trust fund taxes. For willfulness to exist, the responsible person must have: a) been aware or should have been aware of the outstanding taxes; b) either intentionally disregarded the law or was plainly indifferent to its requirements. The portion of the payroll taxes that may be assessed against responsible individuals is called the trust fund recovery penalty.
Many employers, business owners, and/or corporate officers are not aware of the exact nature of the Trust Fund Recovery Penalty. The first question is often: How much is this penalty? The computation of the penalty is true to its name and is as follows:
Unpaid employee income taxes subject to withholding;
Unpaid employees’ portion of social security subject to withholding (6.2% x wages);
Unpaid employees’ portion of medicare subject to withholding (1.45 x wages).
The penalty amount does not include the interest and penalties that are assessed against the employer for nonpayment. The computation is complicated if some payroll payments have been made by the employer. Voluntary payments are applied to the tax, penalty and interest in that order and first to the oldest year. Involuntary payments, such as levies and installment agreements, are applied in the same manner. However, voluntary payments can be specifically designated by the taxpayer to apply in any manner they see fit. All voluntary payments on employment taxes must be specifically designated as for the trust fund recovery penalty portion of the liability or the IRS will apply as previously mentioned. Also, if the business pays the trust fund penalty portion, then the individuals will get credit towards the penalty owed by them and vice versa.
