The Trust Fund Recovery Penalty (TFRP) is also sometimes referred to as the Responsible Person Penalty, Responsible Officer Penalty, or 100% Penalty. Shareholders, Officers, and certain employees can be held personally liable for a corporation’s failure to pay certain payroll taxes.
Employment taxes, also referred to as payroll taxes or Form 941 taxes and Form 940 taxes, are unique. Employment taxes include the following taxes:
- Federal income tax withholding (FITW)
- Social Security and Medicare taxes (FICA)
- Federal unemployment taxes (FUTA)
Employer’s Duty to Pay Withheld Funds
There are a number of reasons why a company may not pay withholding taxes to the IRS. For instance, those in charge of a company’s employment taxes may not be aware of the company’s employment tax obligations or how to meet them. Likewise, a company may simply forget to withhold income, Social Security, and Medicare taxes from employees’ wages when it runs payroll. Sometimes payroll and employment taxes may be forgotten in the struggle to keep a company running. Other times, companies find themselves in positions of having to make difficult financial decisions and tap into or borrow the taxes withheld from employees’ wages, using the money to pay other expenses and creditors, instead of paying the money to the IRS. More nefarious reasons include situations in which an employee makes a tax mistake and conceals it from his or her employer, or when a dishonest employee or payroll service provider steals or embezzles the withheld taxes.
Regardless of the reason, a company that fails to pay trust fund taxes to the government in a timely manner opens itself up to scrutiny, potential penalties, and even criminal prosecution. Further, it may subject “responsible” persons to personal liability for the company’s taxes.
While shareholders, officers, directors, members, managers, partners, and employees of corporations, limited liability companies, and partnerships are generally not personally liable for corporation, limited liability company, or partnership debts and obligations, they can be held personally liable for certain taxes under the TFRP.
Through its use of the TFRP, the IRS is authorized to “pierce the corporate veil” by assessing liability for the unpaid trust fund portion of a company’s employment taxes against the individuals that are responsible for the company’s failure to properly withhold and pay such trust fund taxes.
The TFRP imposes personal liability on “responsible persons” for “willful” failure to collect and pay over trust fund taxes withheld from employees. If a person was “responsible” for withholding, accounting for, or depositing or paying trust fund taxes, and “willfully” failed to do so, that person can be held personally liable for the TFRP, which is equal to the full amount (100%) of the unpaid trust fund tax, plus interest.
“Responsible persons” are those persons who have a duty to collect and pay over withholding taxes. Oftentimes, responsible persons are those persons who have authority to sign company checks, control payroll, sign tax returns, or direct the accounting of a company. A responsible person for this purpose can be an officer or director of a corporation, a shareholder, a member or manager of a LLC, a partner of a partnership, or an employee of any form of business, in addition to other individuals.
“Willfully” generally means that the responsible person knows that employment taxes are due, and paying other creditors instead of the IRS.
At Compass, our tax advisors can help you and your company navigate through its employment tax issues and potential or actual TFRP issues, and minimize the negative consequences to both you and your company.