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What is a payroll-related Trust Fund Recovery Penalty?

On Behalf of | Apr 1, 2022 | Internal Revenue Service

State and federal laws require many employers to take certain deductions from their employees’ paychecks. Whether they must deduct anything depends, in part, on the workers’ employment status. For example, employers who have independent contractors (ICs) may not be required to withhold contributions. In contrast, those who have part or full-time workers may have an obligation to withhold and remit contributions for social programs, such as Social Security, Medicare and an employee’s federal taxes, on their workers’ behalves.

The money an employer withholds from an employee’s paycheck earmarked for remittance to the Internal Revenue Service (IRS) is held in a trust for future remittance to the federal revenue agency. While some employers withhold these employee contributions as required by law and remit them as required to the IRS and state revenue authorities, others fail to do so. The IRS may initiate trust fund recovery efforts to have employers personally pay any unpaid payroll taxes in instances like these.

What a trust fund recovery penalty is

The Trust Fund Recovery Penalty (TFPR) process involves the IRS pursuing almost anyone associated with a company to recover the unpaid payroll taxes that the federal agency deems it’s owed, including its:

  • Owner
  • Corporate officers
  • Shareholders
  • Employees

The IRS may also have the latitude to pursue an employer’s affiliated businesses, such as directly-owned partnerships, limited liability companies (LLCs) or corporations and even outside entities as part of the imposition of a TFRP.

How does the IRS try to recover employers’ unpaid payroll taxes?

The IRS is authorized to use a variety of approaches in attempting to recover any payroll taxes that they allege went unpaid, including imposing tax levies or liens on a company’s property, financial accounts or investments.

IRS officials may even come after individuals personally associated with the business, as outlined above if the federal agency believes that person played a role in willfully failing to remit employees’ withheld payroll taxes.

A few ways that the IRS determines whether a specific individual might have been willfully responsible for the unpaid payroll taxes and thus subject to the trust fund recovery penalty include if that person:

  • Was responsible for hiring or firing employees
  • Owns a percentage of the business
  • Has check signing authority
  • Signed the company’s tax returns

The IRS also considers an individual’s role within a business hierarchy before pursuing levies and liens against them as part of the TFRP process.

IRS officials have three years from the alleged date of the penalty to initiate the levy process or assess other penalties, including referring the case over to federal criminal prosecutors with the U.S. Attorney’s Office. Allegedly delinquent taxpayers often have some inclination as to how involved the IRS believes they are because revenue authorities conduct interviews with those individuals they deem the most willfully responsible for the unpaid taxes.

Appeals of IRS collection efforts are possible, for example, if an individual contends that they were not in charge of employment tax remittances. However, there is a 60-day statute of limitations in place in order to make an appeal. Once that deadline passes, options to avoid the IRS’ debt collection efforts may become more limited.

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