Failure to Pay Payroll Taxes and the Trust Fund Recovery Penalty

The Internal Revenue Service requires that employers withhold taxes from the wages of employees, and employers are required to contribute similar taxes. This is commonly referred to as “payroll taxes,” and can include income taxes, Social Security taxes, and Medicare Taxes.

The IRS requires that employers file documents with the agency to report the funds being withheld. Employers must file Form 940 and Form 941. Form 940, the Employer’s Quarterly Federal Tax Return, is where employers report Social Security and Medicare taxes withheld. Form 940, the Employer’s Federal Unemployment Tax Return (FUTA Tax Return) provides funds for paying unemployment compensation to employees who lose their jobs. This tax is solely paid by employers, and most pay this unemployment tax at both a federal and state level.

If you are a business owner with employees you must file these forms. The IRS views the failure to pay payroll taxes as a serious violation. If a business owner does not pay the required payroll tax for their business, the IRS will take action. The IRS will be able to collect on the payroll tax owed, as well as penalties and interest on the tax debt owed. The IRS often tries to impose a Trust Fund Recovery Penalty (TFRP) on a responsible person when taxes are not paid.

The TFRP is a way to encourage that employers file Form 940 and Form 941 promptly. This penalty can be assessed because the employer holds the employee’s money in trust until there is a federal tax deposit, and the penalty can be applied if these taxes are not immediately available to be collected. The TFRP can apply to a person who is responsible for collecting and paying withheld income and employment taxes, but willfully fails to pay. The penalty amount will be the amount of unpaid taxes withheld, as well as the employee’s portion of withheld FICA taxes.

If you find yourself in this situation, you will be asked to complete an interview with the IRS to determine how responsible you are for not paying the proper taxes. If you are determined to be a responsible person in not paying the taxes, the IRS will mail a letter that states that they plan to assess the TFRP against you. This initial letter will explain your rights, and notify you that there is a 60 day window in which you will be able to appeal. At this point, and preferably earlier, you should contact an experienced New York Tax Attorney to help you avoid the penalty. If you do not respond to the letter or take action, they will assess the penalty against you and demand payment. Once the penalty amount has been assessed, the IRS is authorized to take collection action against any personal assets you own through federal tax liens, levies on property, or seizure of assets.

You can avoid the TFRP if you pay all employment taxes when required on a timely manner. If you know that you are behind in your payroll tax payments, you should take proactive steps to pay any back payroll taxes owed and settle your tax debt. If you are in need of assistance in preparing Form 940 and Form 941 or need help because the IRS has collection has commenced, contact an experienced tax attorney immediately.