Trust Fund Recovery Penalty

The Internal Revenue Service has a Trust Fund Recovery Penalty, also known as the 100% Penalty for the willful failure of a responsible party who fails to pay payroll taxes. Many companies ranging from large employers to small business can fall behind on IRS payroll taxes or don’t pay over the payroll withholding taxes as required by law. The IRS can hold officers, managers, owners, or directors of a company, or whoever they may deem responsible for unpaid payroll taxes using the Trust Fund Recovery Penalty.

Although not paying payroll taxes because there is a lull in business or a downturn in sales or cash flow may somehow seem justified or logical to a business owner or others involved in company’s financial affairs, it is never a reason to fail to pay payroll taxes. The IRS doesn’t care about a business’s problems and can be unforgiving when it comes to payroll tax compliance.
If you operate a business, are an employer, or work for a company where you have the responsibility or some control over payroll, not only is the business at risk of being shut down and liquidated, but you can also be held personally liable for failure to pay payroll taxes. The IRS can hold you personally liable for the actual amounts withheld for income tax, Social Security taxes, and Medicare plus a 100% Trust Fund Recovery Penalty for those amounts.

The Trust Fund Recovery Penalty is authorized under section 6672 of the Internal Revenue Code.

The Internal Revenue Code - IRC Section 6672(a) provides the general rule:

“Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

Thus, in determining whether to proceed with assertion of the Trust Fund Recovery Penalty, the IRS must determine “responsibility” and “willfulness”. These two elements are not always as obvious to the IRS, but it is in the discretion of the IRS to determine who is responsible and willful. Then, the burden is on the taxpayer assessed to prove their failure to pay was not willful and that they were not responsible. Once the Trust Fund Recovery Penalty is assessed by the IRS, the duty to have to pay the trust fund recovery penalty can be disputed.

As previously mentioned, although a person has to be both "responsible" and "willful" in order to be liable for an employer’s failure to collect or pay over trust fund taxes, the burden of production of the facts and persuasion is on the taxpayer to prove, by a preponderance of the evidence, that they are not a responsible person who willfully failed to collect, account for, or pay over taxes. Proving up you are not responsible or willful for a company or employer’s failure to pay over trust fund taxes can be difficult if you don’t have any experience in dealing with the IRS,  if you are unfamiliar with the latest case law, the Internal Revenue Code, or don’t have any litigation experience in matters of tax controversy.

There are several different types of strategies to deal with the IRS Trust Fund Recovery Penalty and many others to get a business back into compliance. Our tax law attorneys can help protect the rights of individuals who the IRS may deem are responsible for unpaid payroll taxes as well as take positions to keep the company in business while negotiating the Trust Fund Recovery Penalties, interest, and possible solutions to any other payroll tax problems. The IRS takes an aggressive stance against businesses and their agents responsible for the failure to pay Trust Fund Taxes.

If your company or small business has fallen behind on payroll taxes, or has been assessed Trust Fund Recovery Penalties by the IRS, contact the tax lawyers at De Luna Law at 800-897-4076 to see how we can help you.