When payroll is run, taxes are withheld from the employees for their portion of employment taxes including federal income tax, Social Security, Medicare, and any state taxes required. When these taxes are withheld from the employees, they are considered held in trust. Failure to pay these taxes timely may not only expose the business to penaties and interest, but anyone seen as a “responsible party” in the organization.
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.
The Employment Taxes and the Trust Fund Recovery Penalty (TFRP) may be assessed against any person who:
• Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
• Willfully fails to collect or pay them.
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 (no evil intent or bad motive is required).
What does this mean? If you are a business owner who has an employee handle the payroll for your business and they fail to pay the taxes, you may be held personally responsible for the unpaid taxes. You may not have known they were unpaid (maybe you’re not looking at your bank statements, reconciling accounts, or reviewing financial statements). However, since you should have known the taxes were unpaid, it will be viewed as willfully failing to pay the taxes.
What about if you are a board member on a not-for-profit organization? You could potentially be held personally responsible as well. If you had access to information showing taxes were not paid due to poor cash flow, mis-management, etc, you may be seen as a responsible party.
If you have signatory rights for an organization that fails to pay it’s taxes held in trust, you may be held personally responsible for the unpaid taxes.
How will the IRS know if you are a responsible party? You may be asked to complete an interview in order to determine the full scope of your duties and responsibilities. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee’s function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid.
If the IRS determines that you are a responsible person, they will provide you a letter stating that they plan to assess the Employment Taxes and the Trust Fund penalty against you. You have 60 days from the date of this letter to appeal their proposal. Once they assert the penalty, they can take collection action against your personal assets.
You can avoid the TFRP by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required. Make your tax deposits and payments on time. Make sure all payroll taxes are paid first before any other bills of the business are paid. Failing to pay employment taxes first is a sign of willfulness and will subject you to this penalty.
If your company does not want to handle payroll processing, reporting, etc for the business, contact us today. We’ll make sure your taxes are scheduled timely. 310-534-5577 or [email protected].
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