by Steven A. Leahy
Do you run a business? Do you have employees? If you do, you should know about the Trust Fund Recovery Penalty (TFRP). The Trust Fund Recovery Penalty is not really a penalty, in a general sense. Trust Fund Recovery Penalty is “an alternative means of collecting unpaid trust fund taxes when taxes are not fully collectible from the company/business that failed to pay the taxes.”
Let’s start at the beginning. Businesses with employees collect taxes and contributions to retirement benefits from their employees. When an employer deducts federal income taxes, social security and Medicare taxes from an employee’s paycheck, the employer holds those funds in trust until paid to the IRS. In addition, the employer is expected to match the employee’s payments of social security and Medicare and report those deductions and contributions on IRS Form 941, Employer’s Quarterly Federal Tax Return.
If the employer fails to pay those taxes to the IRS, after a time, the IRS will seek to collect those funds, plus penalties and interest, from the business. However, if the business doesn’t pay the 941 taxes due promptly, the IRS will look to the person or persons responsible for collecting, accounting and paying over the taxes to the IRS. The IRS defines a “responsible person” as:
One who had the duty to perform or the power to direct the act of collecting, accounting for, or paying over trust fund taxes.
The owner of a business is almost always a “responsible person.” 941 taxes include three components: Federal Income tax withheld from the employee; social security and Medicare taxes withheld from the employee; and, the employer’s contribution to social security and Medicare. The Trust Fund portion is that portion deducted from the employees’ pay check – Federal Income Tax and the employees’ contribution to social security and Medicare. The employer’s contribution to social security and Medicare is not part of the TFRP, because this tax was not paid by the employee and held in trust by the employer.
Often, the 941 business cases I see in my office turn into two cases – the IRS collects from the business and all of their assets (e.g. receivables, bank accounts, etc) and then begins collection efforts against the responsible person – often the owner of the business. When the IRS collects the TFRP they look to the personal assets of the responsible person (e.g. bank accounts, wages, etc.).
Another important fact to understand as a business owner: The Trust Fund Recovery Penalty is NEVER dischargable in bankruptcy. Most taxes, after a time, are discharagble in bankruptcy. However, because the business held the TFRP in trust, and these types of taxes have priority status, TFRP are not dischargable.
This article discussed the Trust Fund Recovery Penalty and 941 taxes. There are other types of taxes that have the trust status. For example, excise taxes (IRS form 720) and annual return for partnership withholding tax (IRS form 8804) can also be identified as TFRP.
So, if you are in business and withholding funds for the benefit of others, you should be aware of your exposure to this form of tax. If you have failed to file your 941 returns, or have failed to pay the 941 taxes as they came due, you should consult with a local attorney who can help protect you from the IRS’s collection actions. Before you do anything, you should give me a call. We can discuss your options to see if you can avoid a Trust Fund Recovery Penalty, or work out options with the IRS to keep your business in operation. – Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.