If you are an owner of a business, and the business has (W-2) employees, you need to understand the concept of the IRS Trust Fund. Unfortunately, this is not the Trust Fund term that you may be familiar with, where assets are held by one person for the benefit of another. The IRS Trust Fund is a portion of your employee’s paychecks that should have been remitted to the Internal Revenue Service. These monies are called Trust Fund because, according to the IRS, “you actually hold the employee’s money in trust until you make a federal tax deposit in that amount”.

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What happens if you failed to make this deposit or, in other words, if your business accrued 941 withholding tax liability? The IRS will investigate the issue to find a responsible person and assess him or her with a Trust Fund Recovery Penalty (TFRP). In fact, the IRS can assess as many people as they deem responsible with the same TFRP.

The question the Internal Revenue Service asks to determine who is liable for the Trust Fund liability is whether that person was “willful” and “responsible” for the accrued tax liability. In other words, the individual against whom the penalty is assessed must be “responsible” and must have “willfully” failed to pay withholding tax to the government.

Responsibility is a subject of rank, power and duty. The first question the IRS asks is whether or not the person had the “duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes”. You will be asked questions such as whether you are an officer, and if your name is on the bank signature cards of the business bank accounts. Another question is whether you were in charge for the day-to-day operations of the business.

To establish willfulness, the IRS must prove that a responsible person was aware, or should have been aware, of the outstanding taxes and either deliberately ignored them, or was obviously indifferent to tax filing and deposit requirements. A responsible person’s failure to examine, or negligence after being informed that withholding taxes have not been paid, proves the Trust Fund Recovery Penalty “willfulness” component.

There are four components to any withholding tax liability. They include the amount withheld from employee’s paychecks, the employer matching portion, interest, and penalties. The Trust Fund portion of the liability that is assessed against the responsible person is the amount withheld from the employee’s paychecks only. It does not include the employer matching portion, penalties, or interest. Therefore, the Trust Fund portion is usually about 60 percent of the entire withholding tax liability.

If you have been assessed with a Trust Fund Recovery Penalty, the IRS can proceed with enforced collections against you personally. This can include, but is not limited to, bank levies, wage garnishment and seizure of your personal property; unless a repayment agreement is reached with the IRS.

In some cases it is possible to set up a payment plan agreement with the IRS without involving tax professionals. However, if the Trust Fund portion is significant, or if you have not been assessed with the Trust Fund liability yet, or believe that you are not the responsible person, it is imperative that you consult a tax specialist to help you with this matter.

This article was written by Ian Jackson, a tax consultant of 2020 Tax Resolution, which has provided tax debt help to over 15,000 companies and individuals.

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