Understanding the Federal Trust Fund Recovery Penalty or TRFP

Anyone who operates a business that employs people knows the reality of dealing with payroll taxes. In the IRS’s version of this story, employers are responsible actors who dutifully withhold taxes, like Medicare and income taxes, from their employees’ paychecks before paying the employee. Then, the employer promptly (and cheerfully?) remits the withheld taxes to the IRS without delay or drama. Another key factor in this version is that the employer recognizes that this is not the corporation’s money. It belongs to the IRS and the corporation is merely holding it for them in trust, hence the term “trust fund.”  

What happens if a business is short on cash? Many failing businesses struggling to pay their bills often retain the funds withheld from their employees and use it to pay other creditors to assure continued supply of needed goods and services, instead of remitting it to the IRS. Their hope is that business improves before the IRS catches up, but often this doesn’t happen, and they continue doing this month after month.  The cumulative effect is that their debt to the IRS continues to grow, and the cycle often became too difficult for the business owner to break.

The Trust Fund Recovery Penalty Explained

This became enough of a problem that Congress stepped in and enacted the Trust Fund Recovery Penalty or TFRP. What makes the penalty unique is that it can be imposed at the individual level. This means that Jane in accounting may be personally on the hook for the penalty if it is deemed that she was a “responsible party” who willfully failed to pay the company’s payroll tax to the IRS on time. Not only is she on the hook, the amount of the payment is usually equal to the amount that was not sent to the IRS for all of the company’s employees. Jane could be held personally responsible for a great deal of money.

The “Responsible Person”

Under the statute, any person who is responsible for collecting income and employment taxes or paying that withheld tax to the IRS can be assessed the TFRP. Who is considered a “responsible party” is set forth clearly in the statute. Simply put, it is a person or group of people authorized and tasked with the duty to direct the collection, accounting, and remittance of trust fund taxes from the employees to the IRS. Employees of the company are within the “responsible person” category, along with corporate directors or shareholders, a person who has the authority to direct their remittance, another authorized corporation or third party payer, and even payroll service providers.

To be liable for the penalty, however, the responsible person must also “willfully” fail to collect from employees, and/or fail to remit those taxes to the IRS. The bar is set fairly low for the conduct that constitutes “willfulness.” The person must have been or should have been aware that the taxes needed to be collected and remitted and the person was simply indifferent to the responsibility or intentionally ignored it. The person does not have to have a nefarious intent or unsavory motive either for their actions to be considered willful.

Contact Us

If you’re concerned about TFRP issues or just need some advice on tax issues as it relates to your business, the attorneys at Weisberg Kainen Mark have the knowledge and experience to help you with just about any tax issue that may arise in the course of your business. Contact us at (305) 374-5544 today to get started.

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Written by Weisberg Kainen Mark, PL

Weisberg Kainen Mark, PL

Weisberg Kainen Mark, PL is a Miami-based law firm focused on providing comprehensive legal support to individuals and corporate entities caught up in tax controversies or charged with a criminal act. As experienced trial lawyers with a passion for justice, our firm provides clients with compelling advocacy, attorney availability, and creative solutions to your tax or criminal law matters.