What is the Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty can be assessed against responsible parties of a business who choose not to timely submit the “trust fund” portion of their employee’s payroll. The Trust Fund portions of the payroll taxes are from withholdings that are the employee’s portion of the payroll tax, the Social Security/Medicare tax. These are called “trust fund” taxes because they are not the business taxes, but are contributions being withheld from the employee and held in trust until the business submits the taxes to the IRS.

Who is a “responsible party” for a trust fund penalty?

The TFRP may be assessed against any person who is responsible for collecting or paying withheld income and employment taxes and Willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:

• An officer or an employee of a corporation,

• A member or employee of a partnership,

• A corporate director or shareholder,

• A member of a board of trustees of a nonprofit organization,

• Another person with authority and control over funds to direct their disbursement,

• Another corporation or third party payer,

• Payroll Service Providers (PSP) or responsible parties within a PSP

• Professional Employer Organizations (PEO) or responsible parties within a PEO, or

• Responsible parties within the common law employer (client of PSP/PEO).

For willfulness to exist, the responsible person must have been, or should have been, aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. There is no motive or intent requirement. The person does not have to have a bad intent to be assessed the trust fund recovery penalty.