Jump to Navigation
Over 30 Years of Experience handling tax controversies & tax disputes

Payroll taxes and the Trust Fund Recovery Penalty

The Internal Revenue Service does not have the resources to audit every single tax return and thus prioritizes its collection efforts. The agency keeps a close eye on the payment of employment taxes withheld from employee paychecks.

When a company does not immediately transfer these funds, also called trust fund payments, to the IRS there are serious consequences. All responsible persons with an ownership interest in or signatory authority for the company can be held liable.

In an effort to encourage prompt payment of these trust fund payments, congress passed the Trust Fund Recovery Penalty. The IRS can assess multiple owners with the 100-percent penalty. Technically any person responsible for collecting or paying withheld income and employment taxes who willfully fails to collect or pay them is liable.

The IRS website provides a long list of possible responsible people, including officers of a corporation, members of a partnership, corporate directors or shareholders. Willfulness requires the individual was aware of outstanding taxes and “intentionally disregarded the law or was plainly indifferent to its requirements.”

One sign of willfulness is when a business uses funds to pay creditors to ease cash flow issues. In one example, the IRS sought an injunction against both an Iowa-based construction firm and its principal for unpaid employment taxes that exceeded $370,000. The IRS claimed in a lawsuit that the firm treated the withheld trust fund payments as working capital in a practice called “pyramiding.”

When attempts to seek voluntary compliance fail, the IRS can obtain an injunction requiring that a company and any principals timely pay employment tax withholdings and file employment tax returns. When litigation threatens, a tax lawyer can often assist in resolving the issue with the IRS.

 Source: Forbes, "When Payroll Taxes Pyramid It Means Penalties, Even Jail," Robert Wood, August 21, 2014.

No Comments

Leave a comment
Comment Information
Have a Question? Ask an Attorney:

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close
Visit Our
Tax Law Website
Contact Information

Levins Tax Law, LLC
1671 Worcester Road, Suite 304
Framingham, MA 01701

Framingham Law Office Map

Levins Tax Law, LLC
38 Newbury Street, 6th Floor
Boston, MA 02116

Boston Law Office Map
By Appointment Only

Phone: 508-435-0118
Toll-Free: 888-333-9501
Fax: 888-333-0291