Before one can understand what the Trust Fund Recovery Penalty is, it is first necessary to understand what the trust fund is. Contrary to what some people may believe, the trust fund is not an investment account that is being held for a person’s benefit (well not in this case at least). When an employer withholds the employee portion of payroll tax from an employee’s paycheck, the government requires that the business owner hold these funds in the “trust fund” before they are sent to the IRS, coupled with the employer portion of the payroll tax.
So now that we have an understanding of what the trust fund is, we must now delve into what the Trust Fund Recovery Penalty is. When the person who is responsible for paying payroll taxes does not send the IRS the portion of the tax that is being held in the trust fund, they can then be assessed personally by the IRS for this amount of withheld taxes. This means that instead of the liability belonging solely to the business, now the business owner(s), bookkeeper(s), office manager(s), are potentially liable for a portion of the unpaid taxes. By being personally assessed, this means that the employer or other responsible person could be open for aggressive IRS enforced collection action such as liens, levies, and garnishments.
But now that begs the question, how does the IRS determine who is responsible for sending these taxes into the IRS. The IRS investigates to find who if the parties involved were “willful and responsible”. This standard has been elaborated upon by significant case law and pertinent Internal Revenue Manual citations. Some of the factors that the IRS may deem sufficient to establish that an individual is “willful and responsible” are the amount of financial control the individual has over the business or if the individual is listed on the bank signature card. There are some cases where a bookkeeper or secretary could be found to be “willful and responsible” based simply on their tasks around the office.
Responsibility is a matter of status, duty, and authority. The full scope of authority and responsibility is contingent upon whether the person had the ability to exercise independent judgment with respect to the financial affairs of the business. Willful means intentional, deliberate, voluntary, reckless, and knowing, as opposed to accidental. No evil intent or bad motive is required. To show willfulness, the government generally must demonstrate that a responsible person was aware, or should have been aware, of the outstanding taxes and either intentionally ignored them or was plainly indifferent to its requirements. The determination of responsibility and willfulness is dependent on the facts and circumstances of each case.
While this penalty and the thought of personally assessing an individual for a business debt may seem harsh, the rationale makes sense once one thinks about it in context. If a business owner is able to take money out of their employees checks and then not send those funds to the IRS, then this is a form of theft. If the IRS did not have this enforcement mechanism it would promote pyramiding of tax liability and cost the government billions of dollars. If you or someone you know has been or could be held responsible for the Trust Fund Recovery Penalty, you should consult a professional immediately to determine your options and the best possible resolution.
Call Timberline Tax Group at 844-345-3250 for a free consultation.