What is a Trust Fund Recovery Penalty?

Honestly? You almost don’t want to know!

But seriously, the Trust Fund Recovery Penalty is one of the most serious IRS penalties, for a couple of reasons. First of all, then penalty is 100%. Yes, you read that right, the penalty is as much as the tax. Secondly, this penalty can sometimes go hand in hand with criminal prosecution.

Now that I have your attention, let’s define it. This penalty relates to employee payroll. Employers, of course, withhold income and employment taxes from employee paychecks. However, they do not get to keep this money. They are expected to forward it to the IRS. If they don’t forward withholding to the IRS in a timely manner, the Trust Fund Recovery Penalty can apply.

So if I’m not an employer, then I’m off the hook, right? Wrong! The IRS can and does pursue any responsible party in attempting to collect this tax debt. This can include other employees, if they are responsible for the payroll process.

The IRS also looks for willfulness on the part of the responsible party. This means that the person must have been or should have been aware of the outstanding taxes, and either intentionally failed to comply with the law or was plainly indifferent to it. Malice is not a requirement of willfulness!

The important thing to remember is this: some tax problems can be handled without the assistance of a professional, but in my opinion, this is not one of them! The seriousness and severity of this situation calls for expert assistance. Don’t leave this one to chance!