Explaining and Solving Trust Fund Recovery Penalties
Remitting the employee’s trust fund to the Internal Revenue Service (IRS) can be a regular task for any firm, especially when the business organization is functioning well.
But there are situations whereby companies, employers, third-party accountants, or a specific employee might fail to remit the company’s employer’s trust fund to IRS before the deadline. Such a situation will certainly lead to the IRS slapping trust fund recovery penalties to whoever is responsible to remit the fund.
Trust fund recovery penalty can be detrimental. Usually, it either attracts a jail term of up to 5years, a fine of up to $10,000, or in some extreme cases, a penalty of both.
However, to avoid or solve the issue of trust fund recovery penalties, those responsible for the remittance of the fund need to understand certain points. Hence, if you find yourself in such a situation, this post is here to explain how to solve the issue.
What is Trust Fund Taxes
To understand the trust fund recovery penalties, it is necessary to know what trust fund taxes is all about. According to Internal Revenue Service (IRS), Trust fund tax is a form of distinct tax or certain money specifically removed and withheld from an employee’s wages or salary.
This certain money is technically considered to be a combination of income tax, social security, and Medicare taxes. Primarily, it is assumed that the employer holds this money in trust for some time defined by the government regulations, until eventually released to the Treasury or IRS coffer. In another word, Trust fund tax is often referred to as employment tax.
In technical terms, Trust fund tax is a combination of three classes of tax. These classes are mainly Federal Withholding, Employee FICA, and Employer FICA. The Federal Withholding is defined as the special taxes removed and kept from the employees’ wages or salaries by the employer. These taxes are then ultimately paid to the IRS by the employer or whoever is charged with that responsibility.
The Employee FICA, on the other hand, is defined to be a mixture of both social security and medicare taxes. This type of tax is specifically drawn from the employees’ wages or salaries as well.
And Employer FICA is considered to be a combination of the employer’s social security and medicare taxes. Based on the regulated practices, the employer is expected to pay 7.65% of the employees’ wages.
The money from a trust fund tax is expected to be used for retirement benefits and the income taxes documented on their tax returns.
Who is Responsible for the Trust Fund Recovery Penalty?
When it comes to Trust Fund Recovery Penalty, the IRS is usually concerned about who is responsible for the non-remittance of the trust fund tax.
According to the IRS, in most cases, anybody from the company’s top hierarchy can be found responsible. This means that the usual culprit is often found among any of the employers, members of a board of trustees, directors, and shareholders. This is because it is one of them that is often charged with the responsibility of holding the money for the employee to pay the IRS.
To be found responsible for a failure to withhold the employees’ money and ultimately pay to the IRS, it is concluded that the person must have the role of collecting, accounting, and paying of trust fund taxes and at the same time, willfully fails to collect or pay them.
Based on the IRS Code section 6672, individuals can be responsible or personally liable for the trust fund recovery penalty for two reasons:
When they are found to have been fully informed, or aware, of the yet to be paid or delayed taxes. And when subsequently, after knowing, ignored to take action or outrightly unconcerned about the non-remittance of the employees’ trust fund tax to the IRS.
Understanding Trust Fund Recovery Penalty
Following the failure to remit the trust fund tax to the IRS before the deadline, the trust fund recovery penalty is only a matter of when; it is inevitable. However, before a trust fund recovery penalty (TRFP) is charged on whoever is responsible, IRS usually carries out proper investigation to determine who is responsible.
Investigation Process of Trust Fund Recovery
In the process of determining who is responsible and liable for the trust fund recovery, IRS will conduct a transparent investigation on the company. This process often involves the interrogation of all the personnel in a company concerning their roles and duties. For a person to be held responsible, he must however be found to have the duty of paying the employees’ trust fund tax and then willfully failed to pay as at when due.
Evaluating Trust Fund Recovery
Following the determination of whoever is responsible and liable for the trust fund recovery, the next step that IRS would follow is to inform the person responsible through the mail with a letter about the Trust Fund Recovery Penalty assessment and what can be done immediately.
The purpose of this notification through a letter is to explain the appeal right of the responsible individual, which he is expected to assess and reply within 60 days or 75 days if the letter is addressed to the responsible individual outside the US.
However, failure to respond to the mail accordingly will lead to IRS evaluating the penalty against the person and then send a Notice and Demand for Payment.
Procedure to avoid the Trust Fund Recovery Penalty
If it is your responsibility, particularly as an employer, is to pay the Trust fund tax to the IRS, but you have not paid mainly because you do not have the money at that moment, you could try and do something lawful to avoid the inevitable TFRP. In this case, there is an alternative to pay the Trust Fund Portion of the payroll taxes.
Here, the Trust Fund Portion is a Trust Fund Tax excluding Employer FICA. That is, you can first pay both the Federal Withholding and Employees FICA to IRS. This arrangement would certainly refrain IRS from charging you personally for the Trust Fund Recovery Penalty.
The procedure of paying Trust Fund Recovery Portion usually involves writing a check accompanied by some specific information on the memo line. This information includes:
· Business EIN
· Form 941
· Tax Period
· The words “Trust Fund Portion”
However, in a situation whereby you feel you are not the one responsible for the delay or inability of your company to pay the Trust fund tax to the IRS, you can take certain steps to solve the issue or avoid being personally charged for TFRP. Thus, it is recommended to carry out the following steps to solve the Trust Fund Recovery Penalties:
· Compile relevant information
· Acquire affidavits
· Review the statute of limitations
· Negotiate the revenue officer
· Examine the decision of the IRS
· Consider the probability of collection efforts
It is always advisable to avoid the Trust Fund Recovery Penalties as much as you can. This is because the penalty can be detrimental not only to the business or company but to your life if the jail term is involved. But if you found yourself in this precarious situation, it is recommended you seek professional help immediately.
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