Businesses with employees are required to withhold income, Social Security and Medicare taxes from their employees’ paychecks. These amounts are then paid to the IRS at the end of every quarter. Until these amounts are paid to the IRS, the business holds onto the funds in trust (meaning, for the benefit of a third party, here, the IRS). These taxes are therefore called Trust Fund taxes because the business holds these taxes on behalf of the IRS. If a business required to withhold and pay these taxes fails to do so, the IRS will hold the business liable for the tax, and any liens will attach to the businesses assets. If the IRS is unable to collect the taxes from the business, either because the business has closed or is unable to pay the tax for whatever reason, the IRS has the right to pursue any member of the company that the IRS determines was responsible to file and pay the employment taxes and failed to do so. At this point, the IRS may levy the responsible party’s personal assets and wages. When the IRS does this, this is called the Trust Fund Recovery Penalty.
The IRS can only assert the Trust Fund Recovery Penalty on an individual if it can show that the individual was responsible to withhold and submit the taxes, and failed to do so willfully. Some factors the IRS will look to in determining responsibility are power to pay, power to determine which bills are paid, power to make decisions, and authority to hire and fire. Some factors the IRS will look to in determining willfulness include control over corporate funds, choosing to pay other bills before paying the IRS and knowledge that the taxes had not been paid.
The Trust Fund Recovery Penalty can be the most severe of all IRS civil penalties. A company could potentially rack up thousand to millions of dollars of unpaid trust fund taxes, and this could all end up falling on an individual taxpayer. The good news is that the all the remedies available to you to resolve your income tax issue, i.e., Offer in Compromise, Installment Agreement, Currently not Collectible, etc. are available to resolve a Trust Fund Recovery Penalty. Therefore, if you cannot afford to pay it, the IRS will likely enter into an alternative payment agreement with you.
A Dallas tax attorney at Margolies Law Office can defend the business from the initial trust fund assessment if it is not accurate, and if the Penalty is assessed, can defend the individual from the penalty.