I.R.S. Trust Fund Recovery Penalty-now charging criminally

J Thomas Black
Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
Posted on Jun 18, 2018

For those of you that own businesses and have payroll taxes (federal income tax, FICA and Medicare tax) withheld from employees' paychecks but have not paid the money over to the government, you may be in for a surprise. Especially if you owe these taxes for multiple quarters or owe unpaid payroll taxes that total over $100,000, you could find yourself being criminally prosecuted by the U.S. instead of having the I.R.S. pursue you through civil administrative channels for collection as you may be used to them doing in the past.

Generally, if your business owed unpaid payroll taxes in the past, the I.R.S. has done an investigation to find out who the "responsible persons" were, and then assessed the "trust fund recovery" or TFR penalty against them. It's not really a penalty but a collection tool, to make the individual owners of the business personally responsible for the amounts deducted from employees' paychecks, including the federal income tax withheld from the employees' pay and the social security and Medicare deducted from the employees' pay, that was not paid over to the government. This TFR penalty is under the Internal Revenue Code, 26 U.S.C. Sec. 6672.

This amount is then assessed against the individual owners, officers, or other responsible persons, and the I.R.S. starts collection against their individually owned assets and/or income. If you can prove that you had no control over the business's bill paying, you may be able to show that the TFR penalty should not be assessed against you. But the I.R.S. casts a wide net, and if you were a signatory on the company's bank accounts or if you paid other creditors after the I.R.S. tax debt arose, you may be found liable for the TFR penalty.

From now on, the I.R.S. will put an increased effort into prosecuting such responsible persons under 26 U.S.C. Sec. 7202, which states: 

Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution. (Aug. 16, 1954, ch. 736, 68A Stat. 851.)

My recommendation: always withhold and pay over to the government all required payroll taxes. If you fail to do it, and you are determined to be a responsible person, you may not only be facing the imposition of the Trust Fund Recover Penalty, but you could find yourself being criminally prosecuted by the United States and doing serious time in one of their federal prisons.

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