The IRS in the US can impose a trust fund recovery penalty (TFRP) on businesses that fail to withhold or deliver taxes owed to the government. The penalty can also be imposed on individuals responsible for payroll processing. Failure to pay into the trust fund can impact employee benefits.
A trust fund recovery penalty (TFRP) is a penalty that the Internal Revenue Service (IRS) in the United States can use to collect funds that should have been held in a trust fund and transferred to the government. Employers must withhold certain amounts from employees’ paychecks and place these amounts in trust for the IRS, making periodic tax payments to the trust government. If a business doesn’t withhold or withholds but doesn’t deliver the money, the IRS can use a trust fund recovery penalty to get the money back.
The IRS is extremely aggressive about recovering funds that employers must hold in trust. In the eyes of the US government, these funds belong to the government, and if companies do not make their tax payments in a timely manner, the government will put resources to work to raise the money. Also, failure to file trust funds hurts employees, because Social Security money and other benefits are part of the trust fund. If a business does not pay an employee’s Social Security, that employee will not have paid into the Social Security fund, and this may impact benefit eligibility.
When the IRS determines that a business is not collecting funds from paychecks or not paying the IRS, it will alert the business. Usually, the business has time to catch up on payments or come up with a payment plan. If you don’t respond or are extinguished and unable to respond, the IRS may impose a trust fund recovery penalty.
The IRS looks at a business to identify responsible parties, including accountants, people who process paychecks, etc. Any of these parties may be subject to a trust fund recovery penalty in the amount of funds owed. Personal property can be seized and sold and the person responsible will be prosecuted if it is not possible to pay the amount in full.
The definition of a “responsible party” can be broad. If the IRS issues a trust fund recovery penalty, people may try to argue that they are not liable, but often a better defense is that the funds are not collectible. Employees should be aware of the implications of activities such as signing checks or otherwise participating in payroll, as these activities may put them at risk of being viewed as a responsible party should the business fall behind on its payroll taxes. .
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