Employment Taxes & IRS Trust Fund Recovery Penalty
If it is your responsibility to collect and pay employment taxes, this article is a must-read.
Each time you pay your employees, you are responsible for withholding a percentage of the pay for Medicare and Social Security contributions, also known as FICA (Federal Insurance Contributions Act), and income tax, also known as Trust Fund Taxes. As an employer, it is also your obligation to send the income tax withholdings to the IRS.
When a business fails to send the withholdings, the IRS will charge a penalty known as the Trust Fund Recovery Penalty. This is one of the most severe penalties enforced by the IRS on a responsible person or party.
Here’s How the Penalty Gets Calculated by the IRS
The unpaid balance of the trust fund is the starting point for how the Trust Fund Penalty is calculated. The IRS will combine the withheld income tax with the withheld contributions to Medicare and Social Security (FICA), and then they apply “the 100 percent penalty.”
For example, after paying your employee, the total unpaid amount is $150 (income tax and FICA). Now you owe an additional $150. The IRS will enforce no less than 100% of the taxes you owe, that’s why it’s called the 100 percent penalty. One employee might be manageable, but if it happens time and time again with multiple employees over months or even years, it can cause catastrophic financial consequences for your business.
The IRS Determines Who’s Responsible for the Trust Fund Recovery Penalty
Section §6672 of the Internal Revenue Code lists the responsible person as a “person required to collect, account for, and pay over taxes held in trust, who willfully fails to perform any of these activities.” The law states there are two criteria used to determine responsibility, the first is to identify the person within the business. The test will determine if a “person had the status, duty, and authority to control the company’s financial affairs.” The person who signs the checks is usually the person with fiduciary responsibility. The second criterion will be to establish if the person acted with willfulness. The IRS states that if you are paying other business expenses instead of paying taxes withheld to the IRS, you are acting willfully.
When it comes to collecting Trust Fund Recovery Penalties, the IRS is very aggressive. It results in a monetary loss to the IRS and prevents them from funding federal programs. It is also considered tax evasion. One of the most pursued and prosecuted violations within the Internal Revenue Service is not paying the money withheld from your employees’ paychecks. If the IRS has charged you with a Trust Fund Recovery Penalty violation, they will eventually take your assets to collect the amount owed. If you ignore a TFRP violation, the consequences are worse than the penalty itself. Our experience has shown us that when you do not address this major tax problem, it will always lead to financial devastation or worse, Federal prison.
Facing Severe Tax Penalties? Our Jacksonville Tax Attorneys Can Help
J David Tax Law has represented more than 2,100 clients facing Federal criminal prosecution for tax evasion as a result of unpaid Trust Fund Recovery Penalty and/or owed amounts from $100,000 to $7.7 million-dollars in TFRP assessments. You do not want to do an interview with the IRS without legal representation. If they are talking to you, there is a case being built against you.
If you are facing severe penalties from the IRS for any employment tax violation, including assessed Trust Fund Recovery Penalties, contact J David Tax Law in Jacksonville, FL today for a no-cost, no-obligation consultation, and immediate representation.
He is the founder and Managing Partner of J. David Tax Law®. He is the winner of the 2019 Ultimate Tax Attorney awarded by the Jacksonville Business Journal. This award recognizes law firms and attorneys who show exemplary professional talent and skill while demonstrating superior client care, leadership, charitable concern, and civic engagement. Jonathan graduated from Chapman University School of Law. He has practiced law since 2011.
We provide tax solutions for our clients who have IRS and state tax debts, unfiled returns, audits, etc. We advise you on future compliance that enables your individual or business tax problems to be behind you for good.
7077 Bonneval Rd Suite 200, Jacksonville, FL 32216