The Recovery Policy for Trust Funds

When you work for an employer, you will have the standard income and social society taxes withheld from wages these are known as “trust fund” taxes because there are held for payment to the government.

Should a business be facing hard times then in some cases such “trust fund” taxes are not paid to the government and it is not part of a master plan to refuse paying cash to, it is more often a case of an employer needing to part with money they simply don’t have.

Despite the best intentions of an employer to catch up with any owed monies, a situation of this nature will often get worse before it gets better. If and when the IRS become involved then you will notice that they will be very extreme and forthcoming when it comes to chasing unpaid payroll taxes, for those who fail to file the correct payroll tax returns or indeed pay any sum due prosecution is often the outcome.

This can mean bad news because in the eyes of the IRS anyone from the accountant to the director would have looked through all the accounts as well as writing cheques so they could both be considered jointly liable for paying such outstanding taxes out of their own pockets.

When the IRS becomes involved, this system works by assessing the “trust fund recovery penalty” or more commonly TFRP in order to establish who could be responsible for paying any outstanding payroll sums that have become due and while individuals in the company are not responsible for any said debt, with the TFRP anyone from stockholders to directors and employees could all be deemed liable for outstanding payments.

Such a system is becoming more and more difficult with the amounts being owed to the IRS being quite large and unlike being able to potentially distinguish debts by bankruptcy with personal income taxes; the TFRP cannot be removed by filing a bankruptcy petition. When a new business starts, failure is not the expected outcome but it happens too often and this is where problems occur.

Since any debts involving TFRP won’t just go away it is important to rectify this as soon as possible and this often involves the filing of an offer in compromise for consideration so a bad problem can start being rectified.

The IRS discovers most problems when they assess the TFRP or threaten to do so but it is not just employers, directors and employees that could face a penalty, if they handle cheques then accountants/bookkeepers and clerical staff could also be deemed financially liable for this burden. Despite it not yet being supported by law, the IRS will enforce penalties against those who have the ability to write cheques if there are outstanding payroll taxes due.

In some cases there are ways of getting a TFRP removed months or years after it was first assessed, this can happen with a lien that was filed long ago prevents the sale of let’s say, your home or if the IRS starts threatening to enforce action for collection. Such a penalty can be challenged if an outstanding amount of withheld taxes for one employee (for a single tax quarter) and then completing and filing a refund claim.

With this in mind the IRS service will often agree and remove such a penalty but any denial of a refund claim will initiate the appeal process and will go to court if required.

If you need help with a case that involves the TFRP then we will be able to help as we have dealt with many cases involving the assertion of penalties placed on record by the IRS.