- Find out which actions can cause the Trust Fund Recovery Penalty.
- Learn more about how the IRS assesses “responsibility” for the penalty.
- Find out which actions the IRS considers “willful.”
- Learn how to avoid this penalty.
If you own or manage a business with employees, you may be at risk for a severe tax penalty. It’s called the “Trust Fund Recovery Penalty” because it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.
Because the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amount the IRS seeks when they apply the penalty is usually substantial. Often, the IRS is very aggressive in enforcing the penalty. If you do not know much about this penalty, Fiducial is here to help.
The Trust Fund Recovery Penalty is among the more dangerous tax penalties. It applies to a broad range of actions and to a wide range of people involved in a business.
Fiducial offers some answers to questions about the penalty so you can safely stay clear of it.
Which actions cause penalties?
The Trust Fund Recovery Penalty applies to any willful failure to collect, or truthfully account for, and pay over Social Security and income taxes required to be withheld from employees’ wages.
Who is at risk for the Trust Fund Recovery Penalty?
The Trust Fund Recovery Penalty can be imposed on anyone “responsible” for collection and payment of the tax. This has been broadly defined to include a corporation’s officers, directors and shareholders under a duty to collect and pay the tax. It can also apply to a partnership’s partners, or any employee of the business with such a duty. Even voluntary board members of tax-exempt organizations, generally excepted from responsibility, can be subject to this penalty under certain circumstances. In addition, in some cases, responsibility has extended to family members close to the business. Attorneys and accountants may also be held responsible.
The IRS says responsibility is a matter of status, duty and authority. Anyone with the power to see that the taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. A taxpayer held liable can sue other responsible people for contribution. However, this is an action he or she must take entirely on his or her own after he or she pays the penalty. It isn’t part of the IRS collection process.
Here’s how broadly the net can be cast: You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay over withheld taxes and have the power to pay them but instead make payments to creditors and others, you become a responsible person.
What’s considered “willful?”
For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bending to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes that are due the government is willful behavior. And just because you delegate responsibilities to someone else doesn’t mean you’re off the hook for the Trust Fund Recovery Penalty. Your failure to take care of the job yourself may be considered as the willful element.
Avoiding the Trust Fund Recovery Penalty
You should never allow any failure to withhold or any “borrowing” from withheld amounts — regardless of the circumstances. All funds withheld must also be paid over to the government. Want more information about this penalty and making tax payments?Need help getting your taxes together? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!
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