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The Trust Fund Recovery Penalty: Why You REALLY Need to Pay your Business’ Employment Taxes

July 10, 2015  |   Tax News   |   Tags: , ,  

The Trust Fund Recovery Penalty (TFRP) is a penalty the IRS charges on employers who willfully fail to withhold and pay income and employment taxes. This penalty also applies to taxpayers who attempt to evade taxes altogether. The TFRP also applies to “collected” excise taxes, and not to the employer’s portion of employment taxes.

employment taxes

The TFRP is charged to encourage employers to withhold income and employment taxes from their employee’s pay. An employer is legally required to withhold taxes such as Social Security taxes, railroad retirement taxes, or collected excise taxes.

These taxes are collectively known as trust fund taxes. If any of these taxes remain unpaid and cannot be collected immediately by the IRS from the employer, the TFRP may be charged.

The TFRP Penalty Amount

The amount of the penalty charged is equal to the unpaid balance of the trust fund tax. The IRS determines the amount of penalty based on:

  • The unpaid income taxes withheld, plus
  • The employee’s portion of the withheld FICA taxes.

With respect to collected taxes, the TFRP is based on the unpaid amount of collected excise taxes.

IRS Letter Regarding the Penalty

If the IRS establishes that you did not pay employment taxes on time, you will receive a letter informing you about the TFRP. You have 60 days from the date on the letter (75 days if the letter is addressed outside the U.S.) to make an appeal if you disagree with the IRS.

To better understand your rights and responsibilities, as well as the appeals process, use Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don’t Agree.

If you do not reply to the letter, the IRS will assess the penalty against you. They will send a Notice and Demand for Payment after assessing the penalty. After this, the IRS can take aggressive collection action.

Staying Compliant

To avoid the TFRP, employers must ensure that they collect the correct amount of employment taxes and transfer them to the IRS on time. If an employer is unable to pay the taxes on time, they must contact the IRS and explain their situation.