Trust Fund Recovery Penalties, Part I

As we noted in last month’s series on employment taxes, every business with employees is required to remit employment taxes to the federal government. These taxes, held in trust by employers for the benefit of their employees, may be collected directly from personal assets of the owners and operators of a business if not payed over to the government. The federal government and the State of California are very aggressive in pursuing the collection of these trust fund taxes and impose harsh penalties on those who disregard the law.

Judge calls Kentucky businessman “a living example of chutzpah”

Kentucky businessman Wilbur Anthony Huff was recently sentenced to 12 years in prison, ordered to forfeit $10.8 million to the government and will have to pay more than $108 million in restitution to his victims, including the IRS and the FDIC.

Among Huff’s numerous companies was 02HR, a professional employer organization that managed the payroll, tax and worker’s compensation insurance obligations of its client companies. Instead of remitting funds to the appropriate taxing authorities, Huff diverted the funds to his other business ventures and for personal and family expenses, including payments on his homes and luxury cars. The judge in Huff’s case was appalled by his audacity, calling him “a living example of chutzpah.”

“Trust fund” taxes

Huff was severely penalized for his failure to pay over to the authorities the employment taxes that were due: federal income tax, Social Security and Medicare taxes withheld from employee wages (also called “trust fund” taxes); and employer matching Social Security and Medicare taxes. Under IRC 6672(a), any person who is required to collect, account for, and pay over those taxes and willfully attempts to evade or defeat such tax is liable to a penalty equal to the total amount of the tax evaded, not collected, or not accounted for and paid over. 

The penalty assessed against Huff is called the “trust fund recovery penalty” (TFRP), commonly referred to as the “100% penalty” or the “941 penalty.”

Hire an experienced tax law firm 

The IRS has up to three years to assert the TFRP and once it does so it will begin to implement collection activities against your personal assets. If you have been notified that the IRS is planning to assert a TFRP against you, you have only 60 days to respond, so act immediately. The experienced tax attorneys and tax pros at Moskowitz, LLP are here to help. Call us today for a consultation. 

In Part II we will discuss how the persons responsible for the trust fund recovery penalty are identified by the IRS and how to protect yourself from personal liability.

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