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Trust Fund Recovery Penalty: Can business owners be responsible?

Owning a business that is not performing can be overwhelming. If the business is not generating enough income you may fall behind on required payments.

Falling behind on your payroll taxes, however, can have negative consequences for both your business and you personally. The IRS can use the Trust Fund Recovery Penalty (TFRP), sometimes called the 100% penalty, to recoup these taxes that you collect and hold on the government's behalf. As the business owner or officer, you may be individually liable for any fines or unpaid taxes as well.

What is the Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty allows the IRS to recover unpaid taxes from a business and assess penalties and interest. The name of the law comes from the process - employers deduct these sums from employee wages and then hold them in trust before paying them over to the IRS. The IRS is able to come after 100% of the unpaid tax liability and may even add interest on to that total. This law can be used to recover:

  • Federal income tax
  • Social Security and Medicare taxes
  • Employer matching Social Security and Medicare taxes

Are you responsible for payment?

If the IRS does not receive the appropriate tax funds from a company, they will go after the owner or partner involved with the business. A responsible person is anyone in the company who has the authority to dictate how the business uses its available cashflow. This could be the owner of an LLC or each partner within a partnership. If you are considered a responsible person you may be held accountable for any unpaid trust fund taxes. The Trust Fund Recovery Penalty may be applied to any person who:

  • Is responsible for paying income and employment taxes
  • Willfully fails to pay the IRS

Being the owner of your own business makes you a responsible person in the eyes of the IRS. If your business has fallen behind on payroll taxes and you believe you might face penalties, speaking with a tax law attorney can help you mitigate any damages.

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Law Offices of Robert T. Leonard, APC

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