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What is the Federal Trust Fund Recovery Penalty and Will You Be Hit With It?

If you’re a business owner and you have not heard of the Federal Trust Recovery Penalty, you may want to start paying attention. If you are a responsible for withholding, accounting for, depositing or paying specified taxes including employment taxes – and you willfully fail to do this – you can be held personally liable for a penalty amount.

What does this mean exactly?

Essentially, the responsible person in the organization is responsible for making sure the specific taxes, including employment tax is paid to the Internal Revenue Services. A “responsible person” may include the owner, officer of a corporation, a partner, sole proprietor, a trustee or agent with authority over the business funds, or an employee of any form of business, including a bookkeeper.

When the IRS stats that the party “willfully” fails to pay those taxes, “willfully” means voluntarily, consciously and intentionally. Essentially, you are acting willfully if you pay other expenses of the business instead of the withholding taxes. And if you are found to have not paid those taxes, the penalty amount is equal to the unpaid balance of the trust fund tax, which includes the unpaid income taxes withheld and the employee’s portion of the withheld FICA taxes.

In order to make sure the income and employment tax is collected from employees and paid to the IRS in a timely manner, Congress allows the responsible business party to collect the amounts from the employee’s income and place them in a “trust,” or holding fund. That is called the Trust Fund Recovery Penalty (TFRP) IRC § 6672.

Who Can Be Responsible for the TFRP?

A person within a business must be deemed the responsible person to collect and pay income and employment taxes. That person (or multiple people) can be an officer or an employee of a corporation; a member or employee of a partnership; a corporate director or shareholder, a member of a board of trustees of a nonprofit organization; a person with authority and control over funds to direct their disbursement, a corporation or third party payer; Payroll Service Providers (PSP); or Professional Employer Organizations (PEO).

How Does a “Responsibility Person” Know If They’re Being Assessed?

The IRS will send a letter to the responsible person stating they plan to assess the TFRP against you. That letter is 1153(DO) and will include Form 2751-Proposed Assessment of Trust Fund Recovery Penalty, which will specify the amount of the penalty and the tax periods in question. You then have 60 days from the date of the letter to appeal the IRS’ decision. It is very important not to ignore a letter from the IRS with a TFRP against you. Because once they do assess a penalty, the IRS can collect that money from you personal assets. So even if it’s your company that has not paid the taxes, the IRS can file a federal tax lien or take levy or seizure action against your personal property.

Understanding the Federal Trust Fund Recovery Penalty and navigating the process if you are assessed a fee is not an easy process. Make sure you consult with a tax attorney or experienced tax professional to help make sure you are protected.

Allison Soares is a partner and tax attorney at Vanst Law. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.

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Allison Soares

Allison Soares, a renowned tax attorney, excels in representing clients before the IRS, FTB, EDD, and CDTFA. With a Bachelor of Arts in Finance from the University of Wisconsin, Milwaukee, and a transformative teaching stint in Brazil, Allison’s diverse background enriches her legal expertise. She pursued law at St. Thomas University School of Law, Miami, complementing it with an MBA in accounting and forensic accounting. Further honing her skills, she obtained a Master of Laws in Taxation from the University of San Diego School of Law. As an adjunct professor at San Diego State University, Allison imparts her knowledge in tax procedures, practice, and ethics. Her accolades include being named Best of the Bar by the San Diego Business Journal and multiple Super Lawyer recognitions. Committed to community service, she volunteers with Forever Balboa Park and Friends of Balboa Park. Allison’s authoritative contributions in tax law are showcased through her publications and speaking engagements.

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