What Is the Trust Fund Recovery Penalty? What Does It Mean For You?

If you’re a business owner or are otherwise in charge of payroll, you have a huge responsibility: withholding, accounting for, and appropriately depositing taxes on employees’ income. Should you fail to appropriately carry out these essentials, you could be held personally liable.

The IRS addresses issues such as withholding and paying taxes through the trust fund recovery penalty (TFRP). Highlighted in Internal Revenue Code (IRC) section 6672(a), this provision serves not as a penalty in the form of a fee, but rather, as a means of imposing liability.

Who Can Be Found Liable Under the TFRP?

The IRC highlights two main factors in assigning the TFRP: responsibility and willfulness. Both elements must exist for somebody to be found liable.

According to IRC section 6671(b), a responsible person can include any officer or employee charged with collecting or paying employment taxes. Corporate titles matter little in this regard: no matter their official position, the person granted control over employment taxes, creditor payments, and general financial operations is most likely to be found liable.

Willfulness also matters. To be deemed liable based on the TFRP, the responsible party must have made a conscious decision to not collect or pay for employment taxes. To avoid the TFRP, responsible individuals should prove that they were unaware of their company’s failure to pay.

What Happens If I Qualify for the TFRP?

If the IRS deems you both responsible and willful, you’ll be assessed a penalty equal to the amount that should have been paid based on FICA. If you’re unable to have this reversed through an appeal, the funds could be garnished from your wages — or your assets could be seized. As such, it’s important to take threats of TFRP action seriously.

The team at the Highland Tax Group can help you take a proactive approach to reduce the risk of suffering the TFRP. Contact us today for more information.