The IRS requires employer’s to withhold income and employment taxes from their employee’s paychecks. These taxes are held in trust for the government and the employer is liable to turn the money over to the IRS. If the employer fails to withhold or to pay these employment taxes, the IRS may assess the trust fund recovery penalty, which is equal to 100% of the required withholdings.
In the current economy, it is not uncommon for a business to fall behind on withholding payments in an effort to keep the company afloat. This is dangerous ground, as it may lead to personal liability and additional penalties and interest which is much more costly than if the taxes were timely paid and funds were borrowed commercial or personally to make up the shortfall. Moreover, bcause a business may not deduct the withheld portion of employee’s wages, the trust fund recovery penalty is non-deductible.
Two common situations in which the IRS will easily notice nonpayment of employment taxes are when a return is filed but no tax is paid, or when a return is not filed and taxes are not paid but employee’s report withholding on their personal tax returns.
The trust fund recovery penalty is assessed against the employer itself and may also be simultaneously assessed against any individual the IRS considers to be a responsible person for the collection and payment of employment taxes (i.e. multiple potential deep pockets assessed simultaneously). This includes those who are responsible for collecting or paying income employment taxes and who willfully attempt to evade or defeat paying them. Willfully means that a responsible person knew or should have known to pay the employment withholding and taxes and intentionally disregarded or was indifferent to the requirements of the law. Furthermore, a person who willfully attempts or evades paying employment taxes may face criminal liability.