In general, the IRS imposes a penalty against any person who has the obligation to either collect, or pay over employment taxes that are withheld from an employee’s salary, when those monies are not paid to the IRS. Often this happens, when a business is having financial difficulties and uses the payroll withholding to pay other expenses.
The Trust Fund Penalty is not a true penalty. It is the amount of monies that should have been paid to the IRS, that were taken from the employees wages (federal withholding taxes, and social security). Therefore, it is actually a portion of the the wages which were not paid, and not a true “penalty”. Therefore, this penalty does not include interest and penalties charged against the employer for the failure to pay in the taxes owed. However, once the assessment is made against the person, interest will begin to accrue.
The IRS can collect from an officer, member, partner or other owner or operator of the business. It sometimes comes as a shock to a person that they are liable for the unpaid taxes since they may have been an owner of the business but not in charge of the financial affairs of the business. In addition, the penalty can be assessed against more than one person, but once it collects it from any other party your liability will also be reduced.
There are defenses to the penalty. For example, if the payroll tax monies were deposited into a bank account, and the account seized by the bank to pay a loan, then there should be no penalty (Rykoff v. US 93-1).
To impose the tax penalty, the taxpayer must have authority to pay over the tax, and the lack of payment must be willful. The IRS terms the person liable, the “responsible person”.
The factors the IRS uses to determine if a person is liable, also includes such factors as the ability hire and fire employees, exercise authority to pay bills, signing tax returns or payroll disbursement forms, having check signing authority, and make payroll tax deposits. The IRS will also look to the ability to pay bills without prior approval, yoru status as a corporate officer, the ability to run day to day operations. In the cases where a person, such as CFO of a company, has technical authority to pay bills and sign tax returns, the IRS will not let that person delegate the authority to another person to avoid the liability. The IRS will not typically assign liability for persons who are acting in a Volunteer basis with an entity. Usually the IRS will conduct an interview of the affected person before they make a decision concerning liability.
The penalty is assessed and the IRS must give written notice to the affected person. The assessment has to occur within three years of when the taxes were due to be paid to the IRS. You can appeal the decision. However, since the penalty is not actually a penalty in a real sense, the abatement of the penalty for reasonable cause is not allowed.