What Is the Trust Fund Recovery Penalty?
The other day I received a telephone call from a person (we will call "Bob") who received a notice from the Internal Revenue Service that stated he was personally liable for the payroll taxes related to his small business.
Bob could not understand why.
He had incorporated his business and thought that incorporating protected him from any personal liability for the payroll taxes.
Unfortunately Bob was simply wrong.
The payroll taxes which include the federal withholding, social security and medicare taxes are all called "Trust Fund" taxes.
This is because the employer is responsible for deducting these taxes from the gross payroll check of the employee.
The employer must then send these tax payments to the IRS.
When an individual who has the responsibility to withhold and pay these taxes does not, then the Internal Revenue Service can assert the Trust Fund Recovery Penalty under the authority of code section 6672 of the IRC.
In regards to Bob and his business, his business was experience some financial difficulties because he had customers who were slow to pay.
So Bob paid his employees their net check but then does not send payment to the IRS for the federal withholding, social security and medicare taxes that Bob withheld from their payroll checks.
This is usually the most common scenario that a business runs into.
Before the Internal Revenue Service will assess the Trust Fund Recovery Penalty, they must determine who the responsible party was for the business and whether the responsible party acted willfully.
A responsible party is a person who has the authority to collect the money and pay the expenses for the business.
It is a person who has the ability to sign checks, make cash deposits and determine what vendors get paid.
A responsible party is also someone who can control the hiring and the firing of employees.
In our scenario, Bob did have the authority to hire and fire employees, sign the checks and determine who got paid and who did not get paid.
Bob could control the outgoing cash payments to vendors and employees.
So he is considered a "responsible party" by the IRS.
When the Trust Fund Recovery Penalty is assessed an individual will have 60 days to respond to the notice.
If an individual does not respond within 60 days, then the penalty will be automatically assessed.
There are several defenses to the assessment of this penalty which will be the subject of a future article.
Bob could not understand why.
He had incorporated his business and thought that incorporating protected him from any personal liability for the payroll taxes.
Unfortunately Bob was simply wrong.
The payroll taxes which include the federal withholding, social security and medicare taxes are all called "Trust Fund" taxes.
This is because the employer is responsible for deducting these taxes from the gross payroll check of the employee.
The employer must then send these tax payments to the IRS.
When an individual who has the responsibility to withhold and pay these taxes does not, then the Internal Revenue Service can assert the Trust Fund Recovery Penalty under the authority of code section 6672 of the IRC.
In regards to Bob and his business, his business was experience some financial difficulties because he had customers who were slow to pay.
So Bob paid his employees their net check but then does not send payment to the IRS for the federal withholding, social security and medicare taxes that Bob withheld from their payroll checks.
This is usually the most common scenario that a business runs into.
Before the Internal Revenue Service will assess the Trust Fund Recovery Penalty, they must determine who the responsible party was for the business and whether the responsible party acted willfully.
A responsible party is a person who has the authority to collect the money and pay the expenses for the business.
It is a person who has the ability to sign checks, make cash deposits and determine what vendors get paid.
A responsible party is also someone who can control the hiring and the firing of employees.
In our scenario, Bob did have the authority to hire and fire employees, sign the checks and determine who got paid and who did not get paid.
Bob could control the outgoing cash payments to vendors and employees.
So he is considered a "responsible party" by the IRS.
When the Trust Fund Recovery Penalty is assessed an individual will have 60 days to respond to the notice.
If an individual does not respond within 60 days, then the penalty will be automatically assessed.
There are several defenses to the assessment of this penalty which will be the subject of a future article.
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