Struggling businesses and trust fund penalties: a Texas case

The Trust Fund Recovery Penalty (TFRP) is a powerful IRS tool for going after certain individuals who are considered personally responsible for a business’s unpaid employment taxes.

We discussed it in considerable detail in an article on which parties can be held responsible.

In today’s post, let’s consider a Texas case that illustrates how this penalty can play out in practice.

Here’s the fact scenario: A doctor with his own practice lent $100,000 to his business in order to make payroll. Though his intentions were good, he ended up getting hit with a $4.3 million Trust Fund Recovery Penalty.

How could that be, when it was one of the doctor’s employees, not the doctor himself, who embezzled payroll tax money?

The U.S. District Court that recently ruled on the case held that the doctor met the definition of a responsible party and that he acted willfully in not paying over payroll taxes to the government.

“Willfulness,” in tax law, does not necessarily involve bad intentions or motives. In this case, the doctor’s intention to pay his employees was certainly a respectable one.

The federal government, however, is aggressive in pursuing unpaid payroll taxes. And the loan that the doctor made to his company came after he had discovered that, due to his employee’s embezzlement, there were unpaid payroll taxes of more than $10 million.

The outcome of the case in federal district court is therefore not as outrageous as it seems at first glance. But the doctor has appealed. And there are many more issues that we can discuss in future posts regarding application of the TFRP when businesses get into trouble with payroll tax compliance.