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Trust Fund Recovery Penalty

Payroll taxes are quite different from income taxes due to the characterization of payroll taxes as a trust fund tax. The portion of payroll taxes withheld from employee paychecks is held in trust for the government until a federal tax deposit is made. Because these funds are held in trust, failure to file payroll tax returns and to pay the tax when it is due can result in a penalty against the business owner — the Trust Fund Recovery Penalty.

The Trust Fund Recovery Penalty can be assessed against one or more individuals who willfully fail to collect or pay the trust fund portion of payroll taxes. Assessment of the penalty has two requirements: The individual must be a “responsible person” and must have acted “willfully.”

Responsible Person

The IRS investigates businesses that are behind on payroll taxes, and will assess the Trust Fund Recovery Penalty against anybody deemed to be a “responsible person.” This term can be applied to any person(s) having the responsibility to withhold, account for, and pay payroll taxes to the IRS. Common examples of a responsible person include the following:

  • Officer of a corporations

  • Partner of a partnership

  • Member of an LLC

  • Sole proprietor

  • An employee

  • Payroll service provider

  • Any other person with authority or control over the funds


For willfulness to exist, the responsible person must have known, or should have known, about the unpaid taxes, and either disregarded or was indifferent to pay the required governmental funds. A common example of willfulness exists when funds earmarked for payroll taxes are used to pay other creditors instead of the government. Once the IRS establishes the responsible person or persons, and the existence of willfulness, the Trust Fund Recovery Penalty will be assessed against all such persons. The amount of the penalty is equal to the income taxes and FICA taxes that are withheld from employee’s paychecks, but does not include the employer portion of payroll taxes.

Resolving a Proposed Assessment of the Trust Fund Recovery Penalty

If the IRS proposes to assess the Trust Fund Recovery Penalty, you have the right to appeal the decision within 60 days. Once the penalty is assessed, the IRS can take collective action against your property. The IRS takes employment taxes very seriously. It is not uncommon for the IRS to propose assessment of the penalty on everybody involved in a business, all in an attempt to collect. If you are behind on your payroll taxes, it is best to contact an attorney that is experienced in resolving these matters. Our attorneys have successfully defended taxpayers against wrongful assessment of the Trust Fund Recovery Penalty. We have also helped business owners get back on track, and negotiated payment arrangements in situations where the penalty was properly assessed.

Most importantly, remember that payroll taxes are held in trust, and the government acts swiftly and harshly when not paid. It is always best to resolve payroll tax issues as quickly as possible and to ensure that payroll taxes are collected and paid on time to avoid this situation altogether.

Contact an Experienced Tax Attorney in the Sacramento Area

If you feel you have been given a wrongful assessment of the Trust Fund Recovery Penalty, we encourage you to contact a tax attorney of NewPoint Law Group, LLP. To schedule a free consultation, call 800-358-0305 or contact us online today.

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