Tax Problems

Trust Funds Recovery Penalty

Failure to remit trust funds exposes you to significant penalties. Get help today.

A concerned woman reading on her laptop

“If you have received notice that you may be liable for trust fund taxes, you need an experienced tax attorney by your side. These types of penalties can pierce the corporate veil and the government can seek collection of the tax from your personal assets.”

- Alyssa Maloof Whatley

Green circle and scales

Pro Tip:

You’re not the only one at risk.

Because of the serious nature of this tax debt, multiple people inside and outside of a business can be deemed to be responsible for restoring the trust funds.

What Is A Trust Fund Recovery Penalty?

When you withhold Medicare, social security contributions, and income taxes from your employees, you’re expected to make timely payment to the IRS of that money.

These are called “trust funds” and the government does not make light of failure to remit them.

If your business fails to make the required trust fund payments on behalf of your employees, the IRS charges a significant penalty called the Trust Fund Recovery Penalty (TFRP).

I Received A Summons. What Should I Do Now?

If you’ve received a summons to an interview you need the guidance of an experienced tax professional.

It’s important to speak with a tax attorney right away because anyone the IRS deems as knowledgeable or responsible for failure to remit the trust funds is subject to assessment for repayment, and in some cases, may even face criminal charges.

“The IRS still needs to make the determination that the failure to pay was a deliberate or willful act. The IRS will vigorously investigate all trust fund cases to ensure that the person – or people – knew the taxes were due and was aware the taxes remain unpaid.”

- Alyssa Maloof Whatley

A woman with her head in her hand while reviewing her Trust Fund Recovery Penalty

How Much Is The Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty is equal to the unpaid income taxes withheld plus the employee’s portion of the withheld FICA taxes.
 
It doesn’t take long for the TFRP to become a staggering debt.

Who Is Responsible For Paying The Trust Fund Recovery Penalty?

People inside and outside the organization can be held accountable for unpaid trust funds. Owners, CEOs, third party payroll processors, non-profit board or trustees members, shareholders, even employees of the business can be summoned by the IRS as part of an investigation.

In order to assess the Trust Fund Recovery Penalty, the IRS must prove two elements: (1) responsible party, and, (2) willfulness. While willfulness seems very intentional, in these types of cases the fact that you paid one creditor like a vendor over the IRS can satisfy the willfulness element. Once the IRS assess a the Trust Fund Recovery Penalty against an individual, they can then attempt to collect from the personal income and assets of that person to satisfy the TFRP.

From left to right, Alyssa Maloof Whatley, Harrison Kulp, and Kiara Maxie

Can I Settle A Trust Fund Recovery Penalty?

Despite the severity of the Trust Fund Recovery Penalty, there are options available to taxpayers who cannot make the payment in full. A qualified tax professional can give you guidance on your options which may include Offer In Compromise or setting up an installment plan.
 
It’s always better to assess your complete financial situation when working with the IRS. An experienced tax pro can help you by negotiating a settlement that works for you.
 
One thing to remember is that TFRP debt isn’t dischargeable in bankruptcy. It’s important to make arrangements with the IRS rather than get into a situation where they levy, seize, or attach a lien to your assets and property.

Calendars implying the Statute of Limitations Trust Fund Recovery Penalty

Is There A Statute Of Limitations On The Assesment Of The Trust Fund Recovery Penalty?

Yes, the general rule is that an assessment of the TFRP must be made within three years from the date a return is filed or the due date of the return (succeeding April 15th), whichever is later.

What Are Non-Trust Fund Taxes?

As an employer, your matching contributions are non-trust fund taxes and personal assets cannot be seized to satisfy that part of a tax debt.