Trust Fund Penalties – Failure To Pay Payroll Taxes

Trust Fund Penalties are charged against those people who are responsible for non payment of payroll taxes. Generally, these taxes include withholding, FICA, and medicare taxes. Your Trust Fund liability will have interest assessed on it once the assessment is made to the responsible party. Responsible parties, according to the IRS include people with knowledge and authority. The collection officer of the IRS will try to assess the penalty to any signer on a tax return, officer of the company, greater than 10% stockholder, etc.

An agent or trustee with authority over the finances of the company can also be held liable.

As an employer, you have a fiduciary responsibility to pay the IRS all money deducted as withholding, FICA and medicare, plus the matching portion. If you are late, you also pay interest and penalties. The matching portion plus the interest and penalties is considered the non trust fund portion of the total potential liability to the company for unpaid payroll taxes.

Trust Fund Penalties are levied on people who have the responsibility of collecting and paying the withheld employment and income taxes but who fail to  make the payment.

People that Trust Fund Penalties may be levied against:

• A person with the control and authority over the finances of the delinquent taxpayer.
• A member of the board of directors.
• A shareholder with more than a 10% interest.
• An employee or member of a partnership business.
• An employee or officer of a corporation.
• An accountant who prepares checks for the company.

I have successfully defended non responsible parties, even when the IRS manual directed the revenue officer to charge that party.

When are the Trust Fund Penalties levied?

Trust Fund Penalties are levied against those people when they there are outstanding taxes and the collection officer feels that the company cannot pay it back over a short period of time, such as a year. Often when there is a payment plan established for the company to pay back the full amount, the collection officer will still attempt to collect the trust fund from any of the responsible parties it can.

How are Trust Fund Penalties amount calculated?

The IRS has a formula for calculating the remaining portion of unpaid trust fund. The liability is broken up into 7 components. Withholding, social security, medicare, employer’s portion of social security, employer’s portion of medicare, interest, penalties. Depending on if the payment was timely, late, or subsequent, the order of application will be different. Often the IRS calculates this incorrectly. I have reduced many trust fund balances for clients by applying the formula correctly. Also, at least in the 5th circuit, if you can show you made payments that exactly match the amount that was due for a period, we can get the IRS to apply the payment the way it should have. Otherwise they apply timely made payments mostly to non trust fund, leaving a higher trust fund balance.
How can Trust Fund Penalties be avoided?

It is possible for you to avoid the Trust Fund Penalties by paying your payroll taxes timely. Examine Circular E for the look back period calculations. That will tell you when your deposits are due. Circular E will tell you the form the IRS wants the deposits. Don’t rely on a letter from the IRS telling you when to make your federal tax deposits. If you need help regarding payroll tax issues, just give us a call.

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