If you are a person responsible for withholding, accounting for, or depositing or paying specified taxes including NRA withholding and employment taxes, and willfully fail to do so, you can be held personally liable for a penalty equal to the full amount of the unpaid trust fund tax, plus interest. A responsible person for this purpose can be an officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty.
"Willfully" in this case means voluntarily, consciously, and intentionally. You are acting willfully if you pay other expenses of the business instead of the withholding taxes.
A trust fund tax is money withheld from an employee's wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury.
When you pay your employees, you do not pay them all the money they earned. As their employer, you have the added responsibility of withholding taxes from their paychecks. The income tax and employees' share of FICA (social security and Medicare) that you withhold from your employees' paychecks are part of their wages you pay to the Treasury instead of to your employees. Your employees trust that you pay the withholding to the Treasury by making Federal Tax Deposits. That is why they are called trust fund taxes.
Through this withholding, your employees pay their contributions toward retirement benefits (social security and Medicare) and the income taxes reported on their tax returns. Your employees' trust fund taxes, along with your matching share of FICA, are paid to the Treasury through the Federal Tax Deposit System. The withheld part of these taxes is your employees' money, and the matching portion is their retirement benefit.
Employment tax deposits are a current expense. Postponing paying them is not the same as making a late payment on your phone bill or to a supplier. Congress has established large penalties for delays in turning over your employment taxes to the Treasury. The longer it takes to pay that money, the more it will cost you.
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:
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:
For willfulness to exist, the responsible person:
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.
The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on:
For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.
If we determine that you are a responsible person, we will provide you a letter stating that we plan to assess the TFRP against you. You have 60 days after we deliver the letter to appeal our proposal. The letter will explain your appeal rights. Refer to Publication 5 (PDF), 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, we will assess the penalty against you and send you a Notice and Demand for Payment.
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 (PDF), Employer's Quarterly Federal Tax Return (PDF).
Employment Taxes and the Trust Fund Recovery Penalty (TFRP)
NOTE: This headliner is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
Headliner Volume 103
December 8, 2004
The Internal Revenue Service cautions employers to collect and pay trust fund taxes as required by law. "Trust Fund" taxes are withheld income, social security and Medicare taxes. These monies are withheld from the salary payments of employees and paid over to the government by employers.
Most employers must withhold, deposit, report, and pay employment taxes on wages paid to their employees and must file Form 941, Employer’s Quarterly Federal Tax Return. For employment tax purposes, wages are defined as all pay to an employee for services performed. It includes salaries, vacation allowances, bonuses, commissions, and fringe benefits.
In addition, an employer may be required to make Federal Tax Deposits of the employment taxes. The IRS recommends making deposits through the Electronic Federal Tax Payment System (EFTPS). EFTPS is safe and secure and over 4 million taxpayers use it pay their taxes. Enroll and use EFTPS to be eligible for a penalty refund and avoid future penalties. Visit IRS .gov for more details. If that is not possible, a deposit may be made using the Federal Tax Deposit Coupon, Form 8109-B with an authorized financial institution. Visit the EFTPS Website for more information on electronic payment.
When an employer does not pay the trust fund taxes, and actions by IRS to collect these taxes are not successful, the responsible officers may be held personally liable for these taxes through the TFRP. The IRS uses the TFRP to facilitate collection of the trust fund portion of taxes. Section 6672(a) of the Code allows the Internal Revenue Service to reach the personal assets of responsible persons who do not withhold and pay to the government amounts required to be withheld.
The TFRP applies if income, social security and Medicare taxes that must be withheld are not paid by the person or persons responsible for the collection of trust fund taxes. The TFRP is a civil penalty assessed against a responsible person for failure to collect and pay over to the Government, withheld and collected taxes. The amount of the penalty is equal to the unpaid balance of the trust fund tax.
The TFRP can be avoided by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required. Make required 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. Additional penalties may apply if the required deposits are not made on time, if they are for less than the required amount, or if EFTPS is not used when required.
For additional information, visit TFRP page for who may be held responsible for the TFRP.