The Trust Fund Recovery Penalty is an important penalty that all business owners should be aware of. What is the trust fund recovery penalty? It’s a 100% penalty that is imposed upon responsible persons who are responsible within the organization to collect and pay IRS taxes.
Who is responsible for collecting and paying IRS taxes in a business?
A responsible person is anyone within the organization that is responsible for collecting either employment taxes or taxes for the organization. An example of this that we often see occurs when a controller within an organization is responsible for payroll taxes and realize the supplier is due a payment and will not provide the supplies if left unpaid, but instead of paying the IRS, they use those funds set aside for the taxes to pay the supplier. This is a dangerous move because that person could be held responsible for the entities taxes.
Determining willfulness to pay taxes
In order to impose the penalty on the responsible person, the IRS has to determine willfulness. In order to do this, a person has to show that:
- they knew the taxes were due and completely disregarded it, or
- they were plainly indifferent – in this case, there is no bad intent required
IRS assessment for imposing the Trust Fund Recovery Penalty
Once the IRS has determined the payroll taxes or the taxes are due, they’ll often conduct an interview in order to determine who the responsible persons are. Oftentimes, the IRS will throw a dragnet over a large number of people within an organization and decide to assess the penalty against a large number of people.
After they’ve determined who they will assess a penalty against, the IRS will typically send a notice giving the responsible individuals 60 days notice that they will make this assessment. After the 60-day period, the IRS will then move forward and file liens and pursue levies unless the responsible persons file an appeal. This appeal is called a collection due process appeal.
If the collection due process appeal is filed timely, the IRS is prohibited by law from pursuing levies of any kind against the personal assets of the responsible person.
Have questions regarding the trust fund recovery penalty or filing an appeal? Contact our team for assistance.