Article Highlights

  • Trust fund penalty
  • Employers can be held personally liable
  • Responsible persons of a corporation or limited liability firm can be held personally liable
  • Factors used in determining a liable responsible person

The term “trust fund recovery penalty” refers to a tax penalty assessed against the directors or officers of a business entity that failed to pay a required tax on behalf of its employees. For example, employers withhold income taxes and FICA payroll taxes from employees’ wages. These funds actually belong to the government and are referred to as “trust funds.” They cannot be used by the employer to pay other business expenses.

Tax law provides that employers are personally responsible for remitting the trust funds to the government. If the employer is a business entity such as a corporation or a limited lia-bility company, then any person who was “required to collect, truthfully account for, and pay over” the funds is liable “for a penalty equal to the total amount of tax” that went unpaid. Once assessed, these “trust fund penalties” cannot be discharged in bankruptcy, and the employer or responsible person(s) will be liable for them even if the business entity itself is liquidated. Other civil penalties, as well as criminal penalties, could also apply.

The trust fund recovery penalty (the amount of the tax that was collected and not paid) can be imposed on any person who:

(1) Is responsible for collecting, accounting for, and paying over payroll taxes; and
(2) Willfully fails to perform this responsibility. Willfulness involves a voluntary, conscious and intentional act to prefer other creditors over the U.S. Thus, if a responsible person knows that withholding taxes are delinquent and uses corporate funds to pay other expenses, such failure to pay withholding taxes is deemed “willful.”

In determining whether an individual is a responsible person, courts consider various factors, including whether the individual:

(1) Holds corporate office;
(2) Has check-signing authority;
(3) Can hire and fire employees;
(4) Manages the day-to-day operations of the business;
(5) Prepares payroll tax returns;
(6) Signs financing contracts; and
(7) Determines financial policy.

If you can be judged to be a responsible person, make sure the trust fund payments are made before any other expenses are paid, even if encouraged not to do so by someone else of authority within the company.

Otherwise you may be held responsible for the unpaid funds, and the liability could follow you to your grave. If you have questions about the trust fund rules and potential penalties, please give this office a call.

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