Our Blog - MC Tax Relief

Sales taxes and employment taxes are the two tax categories that are most frequently included in a TFRP.

The taxation authority must establish through an investigation that trust fund taxes were willfully unpaid and identify the culprit. The full amount of unpaid tax, plus interest, may be owed by those found to be at fault, although there are options to challenge the TFRP or lessen the consequences.

Continue reading to find out more about trust fund taxes, how the trust fund recovery penalty is calculated, and how to challenge it.

***Depending on your state, this penalty may have a different name at the state level. For instance, Illinois has a penalty known as the 100% Personal Liability Penalty that functions similarly to the TFRP. We will refer to the Trust Fund Recovery Penalty throughout this blog for the sake of convenience.

Trust fund taxes are the taxes that businesses are required to withhold from employees or customers and send to the state. You may be thinking of the trust funds owned by wealthy families, but this is not the case.

Businesses are responsible for deducting income tax, Social Security, Medicare, and unemployment tax from employee paychecks. These taxes are held "in trust" for your employees by you as the business owner, who later turns them over to the IRS and/or state tax board.

Sales taxes must be collected from customers when you sell goods that are subject to them. Until you send the sales and use tax to the state tax board, you retain these revenues in trust.

Note : Since use taxes and sales taxes fall under state law, the states would be responsible for enforcing any penalties for late payment.

The amount of trust fund taxes that were withheld but not paid constitutes the IRS Trust Fund Recovery Penalty. Additionally, interest will start to accumulate from the day the tax was due.

Despite the fact that the TFRP only applies to taxes that were actually held in trust (such as payroll taxes withheld from employees' paychecks or sales taxes collected from customers), other penalties may still be imposed if these taxes were never withheld or collected in the first place.

The Trust Fund Recovery Penalty may be imposed on any employee of the Company who is determined to be both liable and willful. The TFRP cannot be evaluated until both conditions are satisfied.

A Trust Fund Recovery Penalty may be imposed on any person who is in charge of collecting and paying trust fund taxes. In a small business, the owner is sometimes assumed to be in charge by default. But it doesn't end there. Who handles payroll? Who handles the accounting? Who authenticates business checks?

When it comes to the TFRP, employees, bookkeepers, accountants, and third-party administrators are all fair game. The ability to choose which invoices to pay is a crucial component of the responsibility test.

Prior to being subject to an IRS Trust Fund Recovery Penalty, a person must also be shown to have been willfully negligent in their nonpayment. It can be deemed intentional activity to choose to pay other payments while omitting to send trust fund taxes, for example. Willfulness may also be proven by reckless disregard for the obligation to collect and pay these trust fund taxes.

There is no requirement for malice. For instance, a business owner may decide to pay payroll expenses rather than taxes because they would be paid later. Regardless of how well-intentioned, it may be construed as intentional behavior to pay other creditors before the IRS or a state taxing body.

The IRS or state tax board may compel payment from one or more of them if they are found responsible for a Trust Fund Recovery Penalty.

You can get in touch with the certified tax resolution specialists at MC Tax Relief if you’re looking for tax problem help.