Trust fund recovery penalty (TFRP) is a legal term that can be confusing to many small business owners. The TFRP is essentially a penalty imposed by the Internal Revenue Service (IRS) when an employer fails to pay the employment taxes it has collected from their employees. These taxes, also called trust fund taxes, include FICA taxes (Social Security and Medicare taxes) and federal income taxes withheld from employees’ paychecks.
The TFRP holds responsible certain persons who are considered to have willfully failed to turn over the trust fund taxes to the federal government. It allows the IRS to collect these taxes from business owners who act as “responsible persons” and fail to pay employment taxes. That means, if you are a business owner, you can reasonably expect the IRS to come after you and the other responsible parties if you don’t pay your back taxes.
How Can a Business Owner Avoid a Trust Fund Recovery Penalty?
First, it’s important to understand the role of the “responsible person.” The IRS considers any individual who has control of, or who can direct the funds used to pay employment taxes as a “responsible person.” This includes board members, corporate officers, shareholders, partners and other managers with the authority to sign checks.
If you are a responsible person, the IRS will hold you accountable for unpaid trust fund taxes. To avoid liability and the TFRP, you need to be proactive and take the necessary steps to make sure that the taxes are paid on time and in full. This includes setting up a system to accurately account for the taxes, ensuring that all deposits are made on time, and working with a trusted tax professional.
In addition to filing the appropriate paperwork and making every deposit on time, it is always a good idea to maintain detailed records and proof of payment for each deposit. This could include copies of canceled checks and deposit slips, employee time cards, invoices, and/or records of deductions.
What Happens if You Don’t Pay the Trust Fund Recovery Penalty?
If you fail to pay the TFRP, then the IRS will take aggressive action to recover the unpaid taxes. This could include filing a federal tax lien, garnishing bank accounts, or even seizing assets like property and vehicles. The worst case scenario is that the IRS could even file criminal charges against the responsible person for willful failure to pay taxes.
Understanding the law and the risks associated with the trust fund recovery penalty is essential to protecting yourself and your business. If you’re a business owner, make sure you’re familiar with the law and the steps you need to take to make sure the trust fund taxes are paid in full and on time.