Many employers these days are trying to run their businesses on limited cash flows. With cash flows tight, sometimes payroll withholding gets overlooked and set aside to pay at a later date. When it comes to what is termed “Trust Fund Recovery Penalty”, let me tell you this is the last thing you want to put to the side to help with cash flow. It’s called the trust fund recovery penalty because it applies to the Social Security, Medicare, and Federal Income taxes required to be withheld by a business from its employees’ wages. Since the government requires these taxes to be withheld from employees’ wages, they are considered property of the government. The employer is just holding them in “trust” for the government until paid. So it is definitely important these are paid on time and are paid in full. The trust fund recovery penalty is among the more dangerous tax penalties because it applies to a broad range of responsible persons and is something the IRS is extremely aggressive about collecting.
What actions are penalized? The penalty is for any willful failure to collect, or truthfully account for and pay Social Security and Federal Income taxes withheld from employee wages.
Who is a responsible person? The penalty can be imposed on anyone responsible for collecting and paying the taxes. This could include the following: Corporate Officers, Shareholders, Directors, or employees responsible to collect and pay the tax. The penalty can be imposed on each of the responsible persons and this could include more than one responsible persons. The IRS says responsibility is a matter of status, duty, and authority. Anyone with the power to see that the taxes are paid may be responsible.
Above it is mentioned the penalty is willful for failure to collect, or truthfully account for and pay the Social Security and Federal Income taxes goes back to my point of simply bowing to business pressures and paying bills instead of paying withheld taxes to the government is a very bad idea. Let’s say are a shareholder or corporate officer and you delegate this payroll task to either an employee or a third party payroll company, you can still be responsible for the penalty. There are court cases that address this issue of delegation, because they had access to the financials to see the payroll taxes were not being paid they were still personally liable for the trust fund recovery penalty. Please contact us or forward to a friend if you need some advice, know someone who this applies to, or need help as to whether this applies to you .