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Running a business requires balancing many responsibilities, such as managing employees, maintaining operations, and complying with federal and state laws. One of the most critical obligations for employers is properly handling payroll taxes, which include trust fund taxes that are withheld from employees’ paychecks. If these taxes are not paid, the consequences can be severe.
One potential consequence of failing to remit trust fund taxes is the possibility that individuals within the company may be held personally liable for the debt through the Trust Fund Recovery Penalty (TFRP). For business owners and corporate officers in Virginia, understanding how trust fund taxes work and their potential liability for the TFRP can help prevent costly legal problems. Our Virginia tax lawyers can help you understand trust fund taxes, how the recovery penalty works, and what steps your business can take to protect itself and its offers from potential liability.
Poole Brooke Plumlee PC offers tax planning advice and representation to individuals and businesses on both federal and state tax matters. We provide strategic legal advice that is designed to minimize potential exposure to penalties and other legal problems. Contact our law firm today to schedule a consultation with a knowledgeable Virginia business tax attorney.
What Are Trust Fund Taxes?
Trust fund taxes are the taxes that an employer collects from employees and holds in trust for the government. Employers then remit the taxes to the appropriate tax authority.
For federal purposes, trust fund taxes include all income taxes withheld from employee paychecks, the employee portion of Social Security, and the employee portion of Medicare. Employers are required to withhold these taxes from employees’ wages and then pay them to the Internal Revenue Service (IRS) pursuant to a regular schedule.
Significantly, these funds belong to the government, not the employer. As such, the IRS treats failure to pay trust fund taxes very seriously. A business that fails to deposit trust fund taxes may face significant penalties, interest, and enforcement actions, including criminal prosecution.
The IRS aggressively pursues trust fund tax debts and frequently investigates whether individuals within an organization should be held personally liable for failure to pay these taxes. When payroll taxes are unpaid, the IRS will often begin an investigation to determine whether the Trust Fund Recovery Penalty should be assessed.
These investigations are typically conducted by an IRS revenue officer. The process often involves reviewing company records, such as bank statements, payroll records, corporate bylaws, and signature cards for company bank accounts. The revenue officer will also interview potentially responsible individuals, asking questions about their authority over payroll, their knowledge of tax obligations, and decision-making authority for payments.
After reviewing the evidence collected as part of the investigation, the IRS will decide whether to propose the TFRP against one or more individuals based on their responsibility and the willfulness of the violation. As described in greater detail below, this penalty can be severe. If your company is under investigation for failure to pay trust fund taxes, you should contact an experienced Virginia business tax attorney immediately.
Understanding the Trust Fund Recovery Penalty
When a business fails to pay its payroll/trust fund taxes, the IRS may impose the Trust Fund Recovery Penalty against certain individuals within the company. The TFRP allows the IRS to hold these individuals personally responsible for unpaid trust fund taxes, even if the tax debt belongs to the corporate entity.
In other words, the IRS can “pierce the corporate veil” and pursue the personal assets of the individuals responsible for the failure to pay these taxes. The penalty equals 100% of the unpaid trust fund tax amount. This means that the IRS can seek the entire balance of unpaid trust fund taxes from any responsible individual within the company.
Liability for the TFRP is not limited to business owners. The IRS can assess a penalty against anyone who is both responsible for collecting or paying trust fund taxes and willfully fails to do so.
These individuals are referred to as responsible persons. They may include business owners, corporate officers, payroll managers, controllers or CFOs, bookkeepers with authority over financial decisions, and anyone with authority to sign checks or direct payments. If more than one person is considered a responsible person, they can each be held liable for the full amount of the unpaid taxes.
When deciding who is a responsible person, the IRS does not just look at job titles. Instead, investigators will consider who actually had control and authority over financial decisions. The IRS will consider factors such as the authority to sign company checks, responsibility for payroll processing, control over financial accounts, ability to decide which creditors are paid, and ownership interest in the company.
In addition, the IRS must also prove that the failure to pay these taxes was willful before imposing a penalty. Willfulness generally means that the individual knew about the unpaid taxes and chose to pay other creditors instead. For example, if a company continued to pay other financial obligations such as rent or net payrolls while not remitting payroll taxes to the federal government, this may be considered willful.
Options for Addressing Trust Fund Recovery Penalties
If the IRS determines that one or more people within a company are liable for failure to pay trust fund taxes, it will issue a Letter 1153 Proposed Assessment of the Trust Fund Recovery Penalty. This letter will include Form 2751, which outlines the amount of the penalty and gives you the opportunity to respond. An individual typically has 60 days to file an appeal and challenge the assessment.
If the penalty becomes final, the IRS can pursue collection against an individual’s personal assets. This may include actions such as bank account levies, wage garnishments, federal tax liens, interception of tax refunds, and seizure of personal property. Even if the business is still in operation, the IRS can still pursue these collection actions until the full amount of the penalty is paid.
If you are facing a potential Trust Fund Recovery Penalty assessment, there are options for addressing the matter. You can challenge the underlying basis for the penalty by arguing that you were not responsible for payroll tax decisions or that you did not fail to pay the taxes willfully. For example, if you did not have financial control or the ability to direct payments, you may be able to successfully challenge the penalty assessment.
You can also file an administrative appeal of the TFRP within the allotted time before the penalty becomes final. If the penalty is finalized, then you may negotiate a payment arrangement or explore settlement options to resolve the penalty.
Experienced Virginia Business Tax Law Representation
If you are concerned about potential liability for failure to pay trust fund taxes, it is important that you get legal counsel sooner rather than later. Getting a lawyer involved early may help you avoid the imposition of a harsh Trust Fund Recovery Penalty. If you have already received notice of a penalty assessment, an attorney can help you explore options for challenging the penalty.
At Poole Brooke Plumlee PC, we are experienced business tax law attorneys. We understand just how seriously the IRS takes nonpayment of trust fund taxes and work hard to help our clients achieve the best possible outcome in these situations. To learn more or to schedule a consultation with a Virginia business tax lawyer, call our law firm at 757-499-1841 or fill out our online contact form.
