A Business Owner’s Guide to The Trust Fund Recovery Penalty and Payroll Taxes
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1) What is the Trust Fund Recovery Penalty?
• If you own a business and you have employees, you are required to pay withheld payroll taxes to the IRS.
• According to IRS federal tax regulations, employers are required to deposit their employees' payroll tax withholding amounts.
• Employers who neglect or refuse to comply with this payroll tax requirement must pay a penalty called the Trust Fund Recovery Penalty (TFRP).
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2) What are “Trust Funds?”
• Trust funds are the portions of the social security, Medicare tax, and income tax withheld from an employee’s pay (7.65%).
• Such funds do not include federal unemployment taxes.
• The employer is deemed to be holding these funds “in trust” for the U.S. Government, hence the term “trust funds” for that portion of the payroll taxes.
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3) Who is Subject to the TFRP? (Responsible Person)
• According to the IRS’s TRFP regulations, any "responsible" business person is subject to handle employees’ payroll taxes.
• This business person will receive a penalty if payroll taxes are not deposited in a timely manner.
• A “responsible” person includes a person who holds a position of responsibility and is aware of the requirement to submit federal employment taxes.
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• A “responsible” person also includes a sole proprietor, partners, corporate officers, and employees, bookkeepers, accounting firms, parent companies, lenders/creditors, and purchasing companies.
• In order for the IRS to impose the TFRP, the "responsible" person must wilfully fail to submit federal payroll tax deposits.
• The IRS can assess a penalty for companies or business owners that don’t follow the rules.
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4) The TFRP Penalty Amount
• The TFRP penalty amount is determined based upon the unpaid balance of the trust fund tax. This includes unpaid income taxes withheld plus the employee’s portion of withheld FICA taxes.
• The IRS will send a letter stating its intention to assess the TFRP penalty.
• The responsible party has 60 days to respond with an appeal.
• If no appeal is submitted within 60 days, the IRS will assess the penalty via a Notice and Demand for Payment.
• The IRS will then launch a total collection action against your personal assets (federal tax lien, levy, seizure claim, etc.).
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5) How to Avoid the TFRP
• If you want to avoid the Trust Fund Recovery Penalty and remain in business, you must stay proactive.
• Refusal to pay will create problems; the IRS takes payroll taxes very seriously.
• Here are a few tips for avoiding the TFRP:
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6) Stay Current
• Stay on top of your payroll accounting.
• Maintain currency with all employment tax returns and 941s.
• If paying them in full is impossible by filing your 941s, aim to show the IRS you are attempting to remain compliant.
• The IRS is kinder to business owners who make an effort, as opposed to ones that disregard the rules and regulations.
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7) Start Fresh
• Business owners should forget the past and focus on the present to help in the situation of TFRP.
• Regardless of how much past payroll tax you owe, start with the current month’s deposits and work from there.
• The IRS notices these small details.
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8) Know the Statute of Limitations
• According to the Trust Fund Recovery Penalty Statute of Limitations, the IRS has exactly three years to notify you of delinquent trust fund taxes.
• After this point, you are not responsible for delinquent trust fund taxes.
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9) Negotiate
• When you know you’ve made a mistake, try to negotiate.
• Always under promise and over deliver when you make a commitment to the IRS.
• If you cooperate with the IRS, it is possible that the TFRP will not be enforced.
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10) Be honest
• Opt for honesty and transparency.
• The IRS is willing to work with you if they feel you’re sincere.
• Never lie to the IRS and always provide information when you have it.
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11) Contact Us
• Seek the assistance of Long Island Tax professionals to better understand TFRP.
• Our expertise and knowledge can improve your chances of remaining in the good graces of the IRS.
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