Call Us! 1-800-555-5555

Unpaid Payroll Taxes

Payroll Taxes may be the worst tax of all to owe because the IRS is very aggressive in their collection attempts for past due payroll taxes.

The penalties assessed on delinquent payroll tax deposits or filings can dramatically increase the total amount owing in a matter of months.

Not only is your business at risk--you may be personally liable, as well. Once the IRS has determined the business cannot pay its past due payroll taxes, they then turn their sights on the individuals who they believe are responsible. This is where the Trust Fund Recovery Penalty comes into play.

Employment Taxes and the Trust Fund Recovery Penalty (TFRP)

To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the TFRP. 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 you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.

The TFRP may be assessed against any person who:

  • is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
  • willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:

  • an officer or an employee of a corporation,
  • a member or employee of a partnership,
  • a corporate director or shareholder,
  • a member of a board of trustees of a nonprofit organization,
  • another person with authority and control over funds to direct their disbursement, or
  • another corporation.

For willfulness to exist, the responsible person:

  • must have been, or should have been, aware of the outstanding taxes and
  • either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).
  • Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.

You may be asked to complete an interview in order to determine the full scope of your duties and responsibilities. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee's function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid. Notice 784, Could You Be Personally Liable for Certain Unpaid Federal Taxes?, contains additional information regarding the TFRP.

Figuring the TFRP Amount

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.

Assessing the TFRP

If the IRS determine that you are a responsible person, the IRS will provide you a letter stating that the IRS plan to assess the TFRP against you. You have 60 days after the IRS deliver the letter to appeal our proposal. The letter will explain your appeal rights. Refer to Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don't Agree, for a clear outline of the appeals process. If you do not respond to our letter, the IRS will assess the penalty against you and send you a Notice and Demand for Payment.

Caution:

Once the IRS asserts the penalty, the IRS can take collection action against your personal assets. For instance, the IRS can file a federal tax lien or take levy or seizure action.

Avoiding the TFRP

You can avoid the TFRP by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required. Make your tax deposits and payments on time. Additional information on employment taxes can be found in Publication 15, Employer's Tax Guide, and Form 941, Employer's Quarterly Federal Tax Return.

 

The IRS is very aggressive in their collection attempts for past due payroll taxes. The penalties assessed on delinquent payroll tax deposits or filings can dramatically increase the total amount owing in a matter of months.

Not only is your business at risk--you may be personally liable, as well. Once the IRS has determined the business cannot pay its past due payroll taxes, they then turn their sights on the individuals who they believe are responsible.

 

Employment Taxes and the Trust Fund Recovery Penalty (TFRP)

To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the TFRP. 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 you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.
Who Can Be Responsible for the TFRP
The TFRP may be assessed against any person who:
is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
willfully fails to collect or pay them.
A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:
an officer or an employee of a corporation,
a member or employee of a partnership,
a corporate director or shareholder,
a member of a board of trustees of a nonprofit organization,
another person with authority and control over funds to direct their disbursement, or
another corporation.
For willfulness to exist, the responsible person:
must have been, or should have been, aware of the outstanding taxes and
either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).
Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.
You may be asked to complete an interview in order to determine the full scope of your duties and responsibilities. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee's function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid. Notice 784, Could You Be Personally Liable for Certain Unpaid Federal Taxes?, contains additional information regarding the TFRP.
Figuring the TFRP Amount
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.
Assessing the TFRP
If the IRS determine that you are a responsible person, the IRS will provide you a letter stating that the IRS plan to assess the TFRP against you. You have 60 days after the IRS deliver the letter to appeal our proposal. The letter will explain your appeal rights. Refer to Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don't Agree, for a clear outline of the appeals process. If you do not respond to our letter, the IRS will assess the penalty against you and send you a Notice and Demand for Payment.
Caution:
Once the IRS asserts the penalty, the IRS can take collection action against your personal assets. For instance, the IRS can file a federal tax lien or take levy or seizure action.
Avoiding the TFRP
You can avoid the TFRP by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required. Make your tax deposits and payments on time. Additional information on employment taxes can be found in Publication 15, Employer's Tax Guide, and Form 941, Employer's Quarterly Federal Tax Return.