Unpaid Employment Taxes: Could Uncle Sam Go After You Personally?

Withholding income and employment taxes and paying them over to the federal government is a significant burden for employers. That is why many employers choose to outsource the administration of those tasks to a third-party.

Even if your company outsources its payroll services, however, the IRS may try to hold you personally accountable if problems arise with paying over the taxes. The IRS may try to do this under the Trust Fund Recovery Penalty (TFRP).

But from whom can the IRS seek to recover the TFRP and under what circumstances?

What are trust fund taxes?

Federal tax law requires employers to withhold various taxes from employees and pay those taxes over to the government at regular intervals. These taxes include income taxes, Social Security taxes and Medicare taxes. In some cases, employers must also collect and pay over certain railroad retirement and excise taxes.

Collectively, these taxes are known as trust fund taxes. The premise is that they are held in trust by the employer until they are deposited with the federal government.

When the IRS doesn't think the proper deposits are being made, it may seek to recover the unpaid taxes by proceeding against persons who can be held responsible for collecting or paying them. Under federal law, the mechanism for doing this is the TFRP.

Responsible parties: who is included?

A responsible person who willfully fails in the duty to collect trust fund taxes and pay them over to the government can potentially be hit with the TFRP. The penalty is steep: the full amount of the taxes that are unpaid.

It isn't only officers or directors that the penalty can potentially apply to, either. It applies to any person with the duty to collect, account and pay the proper taxes and the power to execute those actions.

This definition of "responsible party" could even apply to rank-and-file employees with control over trust fund taxes. It could also include third parties, such as a Payroll Services Provider (PSP) hired to handle a firm's payroll administration.

Indeed, the definition of responsible party could even include individuals who work for a PSP. But if your job is merely to pay the bills at the direction of your boss, you are not a responsible party for purposes of the TFRP.

The role of a skilled tax attorney

If you are contacted by the IRS about unpaid trust fund taxes, it is important to get sound legal counsel. You shouldn't be the scapegoat for unpaid taxes if the limited scope of your role means that you weren't personally responsible for collecting and paying them.

It is also important to realize that the TFRP can only be imposed if the failure to collect or pay trust fund taxes was willful. Willfulness can mean a couple of different things. It could mean you knew or should have known of the unpaid taxes. It could also mean that you deliberately disregarded or were indifferent to legal requirements.

The Trust Fund Recovery Penalty is a civil penalty, not a criminal one. But when payroll taxes are diverted to personal uses, criminal charges for tax fraud or tax evasion can come into play as well. If these sorts of allegations are in play, it is particularly important to seek out the advice and advocacy of a skilled tax attorney.

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