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Trust Fund Recovery Penalty
Trust Fund Recovery Penalty refers to a tax penalty which is assessed against the directors or officers or any other person responsible for withholding accounting for , or depositing or paying specified taxes for the business.
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FIND OUTWhat is a Trust Fund Recovery Penalty?
Trust Fund Recovery Penalty refers to a tax penalty which is assessed against the directors or officers or any other person responsible for withholding accounting for , or depositing or paying specified taxes for the business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty.The reason for the assessment of trust fund recovery penalty is to encourage the prompt payment of withheld income & employment taxes including social security taxes, railroad retirement taxes, or collected excise taxes.These taxes are called trust fund taxes because you actually hold the employee’s money in trust until you make a federal tax deposit in that amount. The TFRP may apply to a taxpayer or business if these unpaid trust fund taxes cannot be immediately collected from the business.
What Are Trust Fund Taxes?
A trust fund tax is money withheld from an employee’s wages (income tax, Social Security, and Medicare taxes) by an employer and held in trust until paid to the Treasury.
When an employer pays their employees, they do not pay them all the money they earned. As their employer, they have the added responsibility of withholding taxes from employee’s paychecks.When an employer withholds income tax and employees’ share of FICA (Social Security and Medicare) from their employees’ paychecks they are part of their wages that the employer pays to the Treasury instead of to their employees. The employees trust that their employer will pay the withholding to the Treasury by making Federal Tax Deposits (FTD) . That is why they are called trust fund taxes.
Through this withholding, the employees pay their contributions toward retirement benefits (Social Security and Medicare) and the income taxes reported on their tax returns. The employees’ trust fund taxes, along with the employer’s matching share of FICA, are paid to the Treasury through the Federal Tax Deposit System.
How is the TFRP Computed?
The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on:
- The unpaid income taxes withheld, plus
- The employee’s portion of the withheld FICA taxes.
For collected taxes, the penalty is based on the unpaid amount of collected excise taxes. Before the determination is made for the responsible person for the trust fund recovery penalty the IRS first sends a letter stating about its notice to assess penalty against the taxpayer . The Taxpayer has 60 days ( 75 days if international ) from the date of the letter to appeal. If the taxpayer does not respond to the notice the IRS will assess the penalty and send a Notice & Demand for Payment .
Avoiding the TFRP
Taxpayers can avoid the TFRP by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required. Taxpayers should make tax deposits and payments on time.
How we can help
We can help you resolve Trust Fund Recovery Penalties. We understand it can be stressful and challenging to deal on your own with the IRS . Call Allay Tax today for free consultation and let our tax experts handle this for you. We will fight for you to get the best possible resolution with the IRS.
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