FAQ About the Trust Fund Recovery Penalty During COVID

Life goes on during a pandemic — and that includes tax confusion and frustration. While deferrals gave many people temporary respite from their IRS concerns, the usual tax drama is now back in full force.

The Trust Fund Recovery Penalty (TFRP), in particular, is a major source of anxiety among those already struggling with the economic fallout of the pandemic. Below, we clarify a few of the most significant concerns related to COVID-era TFRP:

Does the TFRP Apply to the CARES Act’s Social Security Deferral?

The TFRP exclusively applies to the employee’s portions for payroll taxes. The Social Security deferral offered through the Coronavirus Aid, Relief, and Economic Security Act (CARES) applies to the employer’s Social Security tax obligation.

How Do PPP Loans Impact the TFRP?

Guidance from the IRS indicates that a deferral is available for businesses that take advantage of the Paycheck Protection Program (PPP). This deferral applies to the period prior to loan forgiveness. The payroll tax deferral should not be confused with forgiveness — if taxes aren’t eventually paid, significant penalties may be assessed.

Will the Payroll Tax Holiday Impact the TFRP?

A recent executive order from President Trump authorizes employers to defer withholdings for the employee share of Social Security taxes. This applies to all payroll taxes assessed between September 1st and December 31st, 2020. This could hold implications for the TFRP.

The TFRP is typically reserved for those who willfully fail to withhold the appropriate portion of Social Security taxes. A failure to withhold due to an executive action is not likely to be deemed willful by the IRS, but some employers prefer to take extra caution and continue to make withholdings as usual. Those who choose to take the deferral will need to make up for lost time as soon as the payroll tax ends — or risk later assessment of the TFRP.

Still confused about the role of the TFRP during COVID? The experts at the Highland Tax Group can help. Get in touch today to learn more about your options.