Tax
& Business Alert – April 2022
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Actual: 583 words
There’s a harsh tax penalty
that you could be personally responsible to pay if you own or manage a business
with employees. It’s called the Trust Fund Recovery Penalty. It applies to the
Social Security and income taxes required to be withheld by a business from the
wages of its employees.
Because taxes are considered property of the government, the
employer holds them in “trust” on the government’s behalf until they’re paid
over. The penalty is also sometimes called the “100% penalty” because the
person liable and responsible for the taxes can be penalized 100% of the taxes
due. Accordingly, the amounts the IRS seeks when the penalty is applied are
usually substantial, and the IRS is aggressive in enforcing the penalty.
A wide-reaching penalty
The Trust Fund Recovery Penalty is among the more dangerous tax
penalties because it applies both to a broad range of actions and to a wide
range of people involved in a business.
Here are some questions and answers to help you avoid incurring
the penalty.
What actions are penalized? The Trust Fund
Recovery Penalty applies to willful failures to collect or truthfully account
for and pay over Social Security and income taxes required to be withheld from
employees’ wages.
Who is at risk? The penalty can be imposed
on anyone “responsible” for collection and payment of the tax. This has been
broadly defined to include corporate officers, directors and shareholders who are
under a duty to collect and pay the tax, and a partnership’s partners or any
employee of the business with such a duty. Even voluntary board members of
tax-exempt organizations, who are generally exempt from responsibility, may be
subject to this penalty under certain circumstances. In some cases,
responsibility has even been extended to family members close to the business,
and to attorneys and accountants.
According to the IRS, responsibility is a matter of status, duty and authority. Anyone with the power to see that the
taxes are (or aren’t) paid may be responsible. There’s often more than one
responsible person in a business, but each is at risk for the entire penalty.
You may not be directly involved with the payroll tax withholding process in
your business. But if you learn of a failure to pay over withheld taxes and you
have the power to pay them but instead you make payments to creditors and
others, you become a responsible person.
Although a taxpayer held liable can sue other responsible people
for contribution, this action must be taken after the penalty is paid, entirely
on his or her own. It isn’t part of the IRS collection process.
What is considered “willful?” For actions to be willful, they don’t have to
include an overt intent to evade taxes. Simply bending to business pressures
and paying bills or obtaining supplies instead of paying over withheld taxes that
are due to the government is willful behavior. The IRS specifically defines “willfully” in
this instance as “voluntarily, consciously and intentionally” paying other
expenses instead of the withholding taxes.
Just because you delegate these responsibilities to someone else
doesn’t necessarily mean you’re off the hook. Your failure to deal with the task
yourself can be treated as the willful element.
Never borrow from taxes
Under no circumstances should you ever fail to withhold taxes or
“borrow” from withheld amounts. All funds that have been withheld from employee
paychecks should be paid over to the government in full and on time. Contact us
with any questions about making tax payments.
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