I have mentioned Civil Trust Penalties and payroll taxes (941’s) numerous times here on Ask the Tax Wizard. Today I want to dig in deeper and discuss who can be held responsible for these taxes, and how the process works when considering individuals. Below, I’ve included some helpful information regarding this topic from the IRS website. For further information, you will also find this resource helpful.
First of all, it may be helpful to know exactly what a trust fund tax is. To put it simply, it is money withheld from an employee's wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury.When you pay your employees, you do not pay them all the money they earned. As their employer, you have the added responsibility of withholding taxes from their paychecks. The income tax and employees' share of FICA (social security and Medicare) that you withhold from your employees' paychecks are part of their wages you pay to the Treasury instead of to your employees. Your employees trust that you pay the withholding to the Treasury by making Federal Tax Deposits. That is why they are called trust fund taxes. Employment tax deposits are an expense that should be paid immediately. Postponing paying them is not the same as making a late payment on your phone bill or to a supplier. Congress has established large penalties for delays in turning over your employment taxes to the Treasury. The longer it takes to pay that money, the more it will cost you.If you are unable to make your Federal Tax Deposits for your payroll taxes, the IRS will access what is known as the Trust Fund Recovery Penalty (TFRP). The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.The TFRP may be assessed against any person who:
- is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
- willfully fails to collect or pay them.
A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This 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 trustees of a nonprofit organization,
- another person with authority and control over funds to direct their disbursement, or
- another corporation.
For willfulness to exist, the responsible person:
- must have been, or should have been, aware of the outstanding taxes and
- either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).
Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness. You will be summons to complete an interview in order to determine the full scope of your duties and responsibilities. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee's function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid. Once the IRS assesses the penalty, they can take collection action against your personal assets. For instance, we can file a federal tax lien or take levy or seizure action. When you fall behind on your payroll taxes your best options are to contact professional help in order to reach a resolution with the IRS.