Trust Fund Recovery Penalty

Normally, the shareholders, directors, officers and employees of a corporation are not personally liable for the company’s taxes.  However, with regard to certain payroll taxes, personal liability may exist. An employer is required to withhold appropriate taxes from amounts paid to employees, so that the employee receives the net amount. The employee then receives a credit for the taxes that were or should have been withheld by the employer, and the employee is not liable to IRS if the employer does not pay the withheld taxes.  These withheld taxes are referred to as “trust fund taxes”, and the employer essentially holds them in trust for the government.

If an employer fails to pay IRS the withheld trust fund taxes, IRS can ignore the protection normally afforded by the corporate structure, and it can hold certain agents, officers and others personally liable for any taxes withheld but not paid over to it. Essentially, the unpaid trust fund taxes can be assessed as a penalty against certain “responsible persons”.  The penalty is commonly referred to as the “Trust fund Recovery Penalty”, the “100% Penalty” or the “TRCP”.  The TRCP is a powerful collection tool, and is frequently used by IRS.

The persons who are at risk are those who are required to collect, truthfully account for, and pay over any tax imposed under the Internal Revenue Code and who willfully fail to do so or willfully attempt to evade or defeat such tax. In order to be liable, a person must be a “responsible person”, and then “willfully” fail to pay the government the amount of taxes due. In most cases, the determination of whether a person is a responsible person will depend upon that person’s status, duty, and authority over the company's finances or general decision making. In many cases, more than one person is a responsible person, and each may be held jointly and severally liable for the penalty. We find that IRS typically asserts the penalty against numerous persons, sometimes including bookkeepers and other relatively low level employees. One common factor is whether the person has the power to control the decision-making process regarding the allocation of funds to creditors.

If a person is determined to be a responsible person, the issue is then whether than person willfully failed to carry out his or her duties. For example, willfulness exists if a responsible person knows that the withheld taxes have not been paid to IRS and then makes the deliberate choice to pay other creditors. A responsible person may also be held liable by recklessly disregarding a risk that the withheld taxes will not be paid. The responsible person also has a duty to investigate after becoming aware that withholding taxes have not been paid.

This is a complex area of law, and it is easy to unwittingly become personally liable. Any employee who believes he or she could be liable for the TRCP should seek qualified legal counsel.  We have advised and defended many clients against the assertion of the TRCP. Any defense is very fact specific, and advice should be sought before meeting with IRS or completing any IRS questionnaires, in order to insure a complete response is made.
 

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Who we are
Robert R. HendryRobert R. Hendry received both a Bachelor of Arts degree and a Juris Doctor degree from the University of Florida. Although he began his career in Pensacola, Florida, Mr. Hendry has practiced law in Orlando for more than thirty years.
Richard D. StonerRichard D. Stoner received a Bachelor of Arts degree from New York University and a Juris Doctor degree from Stetson University College of Law. He has practiced law in Orlando, Florida for more than twenty-five years.
G. Steven BrownG. Steven Brown is a 1975 graduate of the University of Central Florida, where he received a Bachelor of Science in Business Administration degree with a major in Accountancy.
Law for FloridaHendry, Stoner & Brown, P.A. traces its roots back to 1970, when Robert Hendry and Richard Stoner were principals together in a predecessor law firm. Our attorneys are committed to giving clients the legal edge they need to succeed and prosper.