Trust Fund Recovery Penalty for Small Business Owners

Cash flow is the life blood of any small business. For some businesses experiencing cash flow problems, it might seem reasonable to tap into money that was withheld from employees’ wages for Social Security, Medicare and income taxes. Unfortunately, businesses that start a cycle of “borrowing” from these funds end up creating for themselves and the business an insurmountable tax liability that often ends up being ignored until the IRS comes knocking on the doors of the business.

Failing to properly remit payroll taxes is a serious breach, and the IRS has authority under Section 6672 of the Internal Revenue Code to impose a penalty on any person responsible for withholding and remitting these taxes and willfully fails to do so. So while a corporation or limited liability company might shield an individual from personal liability for business offenses, it cannot shield the individuals of the entity from this personally assessed liability that can follow them long after the life of the business.

This penalty, known as the Trust Fund Recovery Penalty (TFRP) is equal to the amount of money that the employer withheld from the employees’ wages (Social Security, Medicare, and income taxes) and failed to remit to the IRS. The IRS’s rationale is that the individual within the business held these taxes in trust for the government, meaning the funds were never legally theirs to begin with.

Often, after failing to pay over payroll taxes a business faces the consequences of a revenue officer coming in and investigating the financial standing of the business. The parties responsible for withholding and remitting payroll taxes face being assessed a trust fund recovery penalty that they will have to pay whether or not the business can. At this point it is a good idea to talk to someone who knows what options are available for individuals and business owners faced with being assessed the penalty. Like other civil tax liabilities, most options are available for resolving these debts. Call us today to discuss your options.