Trust
Fund Recovery Penalty
It is possible
to negotiate the Trust Fund Penalty with an
Offer in Compromise but, it is not possible to discharge it in Bankruptcy.
The
Trust Fund Recovery Penalty results from failure to pay
payroll taxes.
The
Trust Fund Recovery Penalty or "TFRP" for short isn't as
difficult to understand as it may seem. Here is the breakdown to help you
understand how it works:
Sometimes
a business owner runs into financial difficulty and does not pay the withheld
taxes... not because they are trying to evade, but because they simply can't pay
money they don't have. Of course they did intend to catch up on the payroll taxes
as soon as enough money came in, but the money never showed up.
When
an employer withholds income tax and social security tax from an employee's
paycheck, that money is supposed to be paid to the government by the employer. The
income and social security taxes an employer withholds from the wages of
employees are called "trust fund" taxes because they are in theory
held in trust for the government.
The
Trust Fund Penalty is a legal tool, a civil penalty, whereby the government can
collect corporate tax from the business owner and responsible persons as
individuals. The penalty provides a way to charge a corporate tax liability
directly against any person who had responsibility for the unpaid payroll tax.
Confusion
about how the penalty operates abounds. It sounds like the IRS can be paid
multiple times... not so. The TFRP does not result in the tax being paid more
than once because when the penalty is paid by an individual the corporate
balance is reduced by a like amount. And just because all responsible parties
are assessed the full penalty, IRS will only collect it one time, from whoever
they can. Control
may be the most important factor in determining who will be assessed but, the
IRS will go after those with the deepest pockets first, not necessarily the most
responsible. If you have personal assets, those assets are like bait for the
IRS.
Liens
will be filed against all responsible parties.
The
IRS is very aggressive in collecting unpaid payroll taxes and will try to
collect unpaid payroll tax from anyone responsible for withholding and paying
these payroll taxes to the IRS, including anyone in charge of running the
company, financial decision makers and those
handling financial accounting, payroll, or signing checks. It is surprising sometimes to find out just how
far down the chain of command the IRS goes, sometimes right down to a very low
paid bookkeeper. The
IRS is quite willing to prosecute those who willfully fail to file payroll tax
returns, or to pay payroll taxes.
The
IRS assigns Revenue Officers to collect payroll taxes and to investigate the
financial strength of the business. Failure to correct a delinquent payroll tax
could result in levies on company bank accounts, levies on those who pay the
business or owe the business money, liens against property and general liens that
will show up on the business's credit report.
IRS
aggressive collection activities will take a huge toll on the viability of the
business by damaging important business relationships and management's credibility
which is vital for continued
operations.
Finally,
the IRS can close the business and liquidate the business assets.
A
trust fund penalty is an especially difficult problem for anyone who is assessed
because, unlike income tax, it is a civil penalty and cannot be discharged in
bankruptcy.
It is possible to negotiate the Trust Fund Penalty with the IRS with an Offer in
Compromise.
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