The IRS Trust Fund Recovery Penalty
The Phrase sounds scary and complex. In theory, it isn’t that complex. It can be scary though and especially for the small business owner who is struggling to make a profit each month.
First…Why it isn’t that complex
The basic idea behind the penalty is that Congress wanted to encourage businesses to send in the portion of income, social security and Medicare tax withheld from employee’s paychecks.
So it passed a few laws.
First, it made this tax a “Trust Fund Tax”
Internal Revenue Code 7501 says that whenever any person is the one required to collect any internal revenue tax from any other person and to make sure that it is paid to the US Government, that amount withheld is to be held in “Trust” i.e. it is a “trust fund tax”.
This means that the money shouldn’t be mixed in with other money the business earns while waiting for it’s trip to the Government Bean Counting Room.
Than, it made the Trust Fund Tax one that is owed by the business AND the people responsible for the books at the business.
Internal Revenue Code 6672(a) says that any person who is required to collect or account for this trust fund tax and who doesn’t pay it can become liable for the amount of the trust fund personally.
A few things to take from the above:
1. If you are responsible for collecting and paying the tax (most small business owners meet this requirement because there isn’t anyone else to do it)
2. If the failure to pay the tax was willful.. i.e. you paid other creditors when you knew the payroll tax hadn’t been paid or you just disregarded the problem after being warned by staff.
This penalty can be assessed against you.
For the small business owner, the theory behind the penalty isn’t that complex but the result of it can be scary…for three reasons.
1. You Become Personally Responsible
If you are a responsible party and the action was willful you will personally owe the debt. Not just the business. This can happen even if you don’t own the company.
2. The Debt Can Be Very Large
If the business has 10 employees and those 10 employees are each paid $3500.00 per month on average and assuming an overall tax on the employee paycheck of 10% for income, social security and Medicare…that equals about $10500.00 per quarter.
Fail to pay this for one year’s worth of quarters and the penalty can be as high as $42000.00
3. The Penalty Isn’t dis-chargeable in Bankruptcy
Never. Bankruptcy won’t help in relation to getting rid of the debt.
You have challenge the proposed assessment. If that doesn’t work, you have to try to get the IRS to take less in an offer in compromise. If that doesn’t work, pay it on a monthly basis potentially for a long time.
If you work somewhere that isn’t paying the tax collected from employees, or if you are a small business owner struggling to pay the tax as you go, do what you need to do to get the books in order and to start paying it.
We can help. We are able to review the history of your income and expenses and find ways to stop the bleeding so that the tax can start being paid.