What is the IRS Trust Fund Recovery Penalty (TFRP)? Business taxpayers are responsible for withholding FICA taxes and income taxes from wages of their employees. The payroll taxes and withheld funds that the employer owes to the IRS are collectively known as “trust fund” taxes. When these taxes are not properly turned over to the IRS, the agency conducts an investigation whereby a “trust fund recovery penalty” can be assessed against one or more responsible parties.
Payroll taxes are reported on Form 941 Employers Quarterly Federal Tax Return. When an employer fails to pay the trust fund taxes when due, the IRS conducts a trust fund interview with those parties that may be considered “responsible” and “willful” for managing the company’s finances, specifically the business’s payroll taxes and federal tax deposits. If a party is deemed willful and responsible, per IRC 6672, the IRS will assess the trust fund penalty against that person’s social security number and proceed with collecting the liability.
The penalty amount is usually equal to the total trust fund taxes that remain unpaid. Because an employment tax debt or an LLC or corporation is converted to a personal tax liability of a responsible party, the trust fund recovery penalty is one way the IRS can pierce the corporate veil and collect the back taxes.
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