If you own or manage a business with employees, you could be personally responsible for a harsh tax penalty known as the Trust Fund Recovery Penalty (TFRP). This penalty applies to the mishandling of Social Security and income taxes that must be withheld from employees’ wages.
These taxes are considered government property, and employers are required to collect and hold them in “trust” until payment. If these funds aren’t properly handled, the IRS can impose a TFRP equal to 100% of the unpaid taxes on each responsible party. As a result, the penalty amounts can be significant.
A Penalty with a Long Reach
The TFRP is one of the most serious tax penalties because:
- It is large.
- It can apply to many people involved in a business.
- The IRS has historically aggressively enforced it.
Here are some common questions and answers to help you avoid this costly penalty:
What actions are penalized?
The TFRP applies to willful failures to collect, account for, or pay over Social Security and income taxes required to be withheld from employees’ wages.
Who’s at risk?
The IRS can impose the 100% penalty on anyone deemed “responsible” for collecting and paying these taxes. This may include:
- Corporate officers
- Directors
- Shareholders
- Partners
- Employees with financial duties
- Voluntary board members of tax-exempt organizations
- In some cases: family members, attorneys, and accountants
How is responsibility determined?
Responsibility depends on a person’s status, duty, and authority. Anyone with the power to ensure taxes are paid can be held liable. Multiple people can be held fully responsible.
If you know payroll taxes are unpaid and have the authority to pay them but choose to prioritize other expenses, you could be deemed a responsible person.
Important: A taxpayer held liable may sue others for contribution, but only after paying the penalty in full. This is separate from the IRS’s collection process.
Definition of “Willful”
The IRS does not require intent to evade taxes to prove willfulness.
- “Willfully” means knowingly prioritizing other expenses over withheld taxes.
- Giving in to pressure to pay other bills first still counts as willful.
- Simply delegating tax responsibilities is no defense.
- Failing to act on tax matters may also be considered willful.
“Borrowing” is Never an Option
It might be tempting to “borrow” from withheld taxes to cover urgent expenses — but don’t do it. The funds withheld from employee paychecks must be paid to the government in full and on time.
Failure to do so may result in multiple people being held liable for the entire 100% penalty — even those who were unaware they were considered responsible.
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