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Payroll Taxes and Trust Fund Recovery Penalties

Maryland Tax Attorney – Trust Fund Recovery Penalties

In the United States, businesses with employees are required to withhold and pay trust fund taxes to the IRS.  Trust fund taxes, more commonly known as payroll taxes, include income taxes, unemployment taxes, Social Security and Medicare taxes.  These payments are called “trust fund” taxes because the employer holds the employee’s money in trust until it pays the money over to the U.S. government. 

When a business fails to withhold and pay trust fund taxes to the government, the IRS can assess a trust fund recovery penalty (TFRP).  This penalty can be assessed against any person who was responsible for collecting or paying the payroll taxes and who willfully failed to collect or pay them.   Under the law, a “responsible person” is a person who has the duty or the power to direct the collection, accounting or payment of trust fund taxes.   A responsible person can include an officer, employee, corporate director or shareholder of a corporation, a member or employee of a partnership or any other form of business, a Payroll Service Provider (PSP) or a PSP responsible party, or any other person with authority and sufficient control over the payroll funds to direct the disbursement of the funds.  

In determining whether a person’s actions were willful in nature, the government will look to whether the person was or should have been aware of the taxes due, and whether the person intentionally disregarded the law or was “plainly indifferent” to the legal requirements.  It is important to note that the government does not have to find evil intent or a malicious motive in order to assess the penalty and that using funds to pay other creditors of the business, rather than paying the trust fund taxes owed, may be an indicator of willfulness.

The IRS goes to great lengths to uncover and pursue unpaid payroll taxes.  If a responsible person is found to have willfully failed to pay the taxes over to the IRS, the person can be held personally liable for the penalty.  The amount of the trust fund recovery penalty (TFRP) is equal to the unpaid balance of the trust fund tax.  If a TFRP is assessed against you, the IRS has the power to file a federal tax lien or seize your personal assets in order to collect the penalty owed.  In addition to the TFRP, the IRS also has the ability to criminally prosecute individuals who willfully fail to file or pay payroll taxes.

Resolving Trust Fund Recovery Penalty Disputes

If you have received notice that the IRS plans to assess a Trust Fund Recovery Penalty against you or the IRS has sent you a letter requesting an interview, you should discuss your situation with a Maryland tax law attorney immediately.  Thorn Law Group has extensive experience advising and representing businesses and individuals in audits and trust fund recovery penalty disputes with the IRS.  When you contact an attorney in our Maryland satellite office, we will carefully assess your situation and explore all options that may be available to settle your payroll tax dispute.  Contact Kevin E. Thorn, Managing Partner, at ket@thorntaxlaw.com  or 240-235-5096 today.


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