A Business Owner’s Guide to The Trust Fund Recovery Penalty and Payroll Taxes

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www.longislandtaxresolution.com

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1) What is the Trust Fund Recovery Penalty?

• If you own a business and you have employees, you are required to pay withheld payroll taxes to the IRS.

• According to IRS federal tax regulations, employers are required to deposit their employees' payroll tax withholding amounts.

• Employers who neglect or refuse to comply with this payroll tax requirement must pay a penalty called the Trust Fund Recovery Penalty (TFRP).

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2) What are “Trust Funds?”

• Trust funds are the portions of the social security, Medicare tax, and income tax withheld from an employee’s pay (7.65%).

• Such funds do not include federal unemployment taxes.

• The employer is deemed to be holding these funds “in trust” for the U.S. Government, hence the term “trust funds” for that portion of the payroll taxes.

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3) Who is Subject to the TFRP? (Responsible Person)

• According to the IRS’s TRFP regulations, any "responsible" business person is subject to handle employees’ payroll taxes.

• This business person will receive a penalty if payroll taxes are not deposited in a timely manner.

• A “responsible” person includes a person who holds a position of responsibility and is aware of the requirement to submit federal employment taxes.

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• A “responsible” person also includes a sole proprietor, partners, corporate officers, and employees, bookkeepers, accounting firms, parent companies, lenders/creditors, and purchasing companies.

• In order for the IRS to impose the TFRP, the "responsible" person must wilfully fail to submit federal payroll tax deposits.

• The IRS can assess a penalty for companies or business owners that don’t follow the rules.

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4) The TFRP Penalty Amount

• The TFRP penalty amount is determined based upon the unpaid balance of the trust fund tax. This includes unpaid income taxes withheld plus the employee’s portion of withheld FICA taxes.

• The IRS will send a letter stating its intention to assess the TFRP penalty.

• The responsible party has 60 days to respond with an appeal.

• If no appeal is submitted within 60 days, the IRS will assess the penalty via a Notice and Demand for Payment.

• The IRS will then launch a total collection action against your personal assets (federal tax lien, levy, seizure claim, etc.).

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5) How to Avoid the TFRP

• If you want to avoid the Trust Fund Recovery Penalty and remain in business, you must stay proactive.

• Refusal to pay will create problems; the IRS takes payroll taxes very seriously.

• Here are a few tips for avoiding the TFRP:

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6) Stay Current

• Stay on top of your payroll accounting.

• Maintain currency with all employment tax returns and 941s.

• If paying them in full is impossible by filing your 941s, aim to show the IRS you are attempting to remain compliant.

• The IRS is kinder to business owners who make an effort, as opposed to ones that disregard the rules and regulations.

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7) Start Fresh

• Business owners should forget the past and focus on the present to help in the situation of TFRP.

• Regardless of how much past payroll tax you owe, start with the current month’s deposits and work from there.

• The IRS notices these small details.

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8) Know the Statute of Limitations

• According to the Trust Fund Recovery Penalty Statute of Limitations, the IRS has exactly three years to notify you of delinquent trust fund taxes.

• After this point, you are not responsible for delinquent trust fund taxes.

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9) Negotiate

• When you know you’ve made a mistake, try to negotiate.

• Always under promise and over deliver when you make a commitment to the IRS.

• If you cooperate with the IRS, it is possible that the TFRP will not be enforced.

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10) Be honest

• Opt for honesty and transparency.

• The IRS is willing to work with you if they feel you’re sincere.

• Never lie to the IRS and always provide information when you have it.

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11) Contact Us

• Seek the assistance of Long Island Tax professionals to better understand TFRP.

• Our expertise and knowledge can improve your chances of remaining in the good graces of the IRS.

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