Business owners who have payroll employees are responsible for withholding taxes from their paychecks and placing them in a trust fund before making quarterly payments to the IRS.
Trust fund taxes include the combination of withheld Social Security taxes and Medicare taxes, as well as income taxes that are owed to the Internal Revenue Service. As a business owner, even if you do your best to manage your finances and stay on top of tax payments, it is possible for things to slip through the cracks and to miss out on some of the required tax payments you may owe.
Even if it is an accident when a company fails to pay the employer's share of employment taxes, they will still be held responsible for the consequences of failing to pay trust fund taxes which can involve the additional fine of the Trust Fund Recovery Penalty.
When a corporation has unpaid Form 941 liability (Employer's Quarterly Federal Tax Return), the IRS could affirm the Trust Fund Recovery Penalty ("TFRP") against the shareholders, directors, officers, owners, or employees of a company. By taking this action, the IRS asserts the corporation's TFRP liability against the people that run the business and will collect this liability from their assets.
Compared to other types of IRS fines and penalties that can be added to the total tax liability owed for that tax year, the Trust Fund Recovery Penalty does more than increasing the tax balance due. This penalty has the ability to assign responsibility to an individual or group of people who "willfully" failed to pay what was owed in taxes.
Important: The Trust Fund Recovery Penalty is one of the most serious fines that can be asserted by the IRS, and if you are found to be the responsible person for paying trust fund taxes, the IRS will not hesitate to come for your personal assets as a means of collecting what is owed in tax debt.
As a wage employee who earns payroll, you have the luxury of leaving the organization of employment taxes to your employer. Your employer is responsible for withholding income taxes, Social Security taxes, and Medicare taxes from your pay instead of paying you the entire amount earned. These withheld funds are called trust fund taxes because they are then kept in a trust fund where they will reside until it is time for the employer to pay employment taxes and make a Federal Tax Deposit to the Treasury.
Deducting the correct amount from employees' paychecks is the best way to avoid problems in the future. By consistently withdrawing money from wages and placing the appropriate percentage in a trust fund, employers can maintain a regular quarterly schedule of paying the IRS.
There are seven marginal tax brackets at the federal level, and the higher your income level, the larger percentage of your income you will owe in federal taxes.
FICA stands for Federal Insurance Contributions Act and includes a 6.2% Social Security tax and 1.45% Medicare tax on all wage earnings.
In determining whether to assert the Trust Fund Recovery Penalty against an individual, the IRS looks at various factors involving the party's responsibility and willfulness to pay employment taxes. If you are being investigated regarding a Trust Fund Recovery Penalty, there are ways to contest with the appeals office the process if you can prove that you were not the responsible party or did not willfully fail to make tax payments.
The IRS understands that not all businesses are run the same, and the individuals responsible for certain financial tasks may have a different job title to that of someone who completes the same roles in another company. To accommodate the varying business structures of companies that may be involved with a Trust Fund Recovery Penalty, the IRS conducts a highly factual analysis that reviews all of the duties and responsibilities of employees across different roles in the company.
The IRS also looks at how willing the responsible person is to pay trust fund taxes. To be asserted the TFRP, the responsible party must have both been aware of the outstanding taxes and either intentionally disregarded the responsibility or willfully fails to pay the responsibility due to ignorance.
If an employer knowingly withholds FICA or income taxes that are owed to the Internal Revenue Service, they may be subject to a trust fund recovery penalty (TFRP). A Trust Fund Recovery Penalty is a hefty fine that is equal to the unpaid balance of trust fund taxes withheld. This sum is calculated based on both the unpaid income taxes withheld as well as the employee's portion of withheld FICA taxes.
If a company misuses $10,000 of withheld taxes that were supposed to be paid to the IRS, the company would owe the $10,000 in tax liability as well as an additional $10,000 penalty. Therefore, they would owe the IRS a total of $20,000.
Whether the willful failure of paying trust fund taxes is through negligence or intentionally disregarded, most of the time when people fail to pay their tax liability, it is due to financial hardship. Upon the breakdown of how Trust Fund Recovery Penalties are calculated, it is clear to see that the fine can double the tax debt of the responsible person.
When a company is being investigated for the accumulation of unpaid taxes that have been withheld from their employees, an IRS revenue officer will evaluate the potentially responsible person to be held personally liable for the tax issue. During the investigation process, corporate officers will request thorough financial documentation and information from the company to determine which potentially responsible persons have the decision-making authority to withhold and pay employment taxes.
During this process, the IRS may summon the company owner or person they think is responsible for the missing tax payments to complete a Form 4180 Interview to assess their potential role in the arisen tax issues. The interview investigates the extent of the individual's role and responsibilities in the company to determine if they should be held responsible for the willful failure of paying trust fund taxes.
If the IRS determines that you are the responsible party for paying trust fund taxes but they have yet to receive payment, they will issue a letter stating their intention to assess the Trust Fund Recovery Penalty against you. The responsible person has 60 days from the date the letter was sent to appeal the TFRP proposal, but if you fail to respond to the letter, you will receive a Notice and Demand for Payment.
Once the TFRP has been formally issued against you, the IRS can file a federal tax lien or issue a bank levy to take collection action. When someone owes outstanding tax debt to the government, IRS collection efforts can include levies or garnishments on wages, levies on bank accounts, and the seizure of assets to help ensure the tax debt will be paid.
A bank account levy occurs when a creditor contacts your bank to withdraw funds from your account if you have been failing to pay your tax debt.
Wage garnishment occurs when an employer is required by a court order to withhold an individual's earnings from their paychecks to be paid directly to the government.
When a debtor fails to pay what they owe in federal income taxes, the IRS can place a federal tax lien on your property which provides the government with a legal claim to your personal assets.
Similar to other tax liabilities you may accumulate, there are options when it comes to managing your tax debt and paying what you owe to the IRS. If the IRS assesses a company's tax liability and determines that the potentially responsible person is necessarily liable, the best method to remove a Trust Fund Recovery Penalty is to pay what is owed in trust fund taxes every quarter to avoid the penalty being issued.
If a company is unable to pay the full amount owed in trust fund taxes or once a TFRP has been issued, you can consult a tax professional to help you settle with the IRS.
When a company lacks sufficient available funds to pay what they owe in trust fund taxes, it can sometimes be eligible to reduce its tax debt by negotiating a payment plan with the IRS.
If a company cannot afford to pay what they owe in tax liability, it can sometimes settle with the Internal Revenue Service and agree to an Offer in Compromise in which the party owes less than its total tax liability.
It can be challenging to navigate the legal nuances of the internal revenue code when facing the consequences of unpaid taxes. If you are a business owner who is a responsible person for paying trust fund taxes and you are issued a Trust Fund Recovery Penalty, consulting tax professionals like those at Ideal Tax can help you issue an appeal and restore your good standing with the IRS.
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