Trust Fund Recovery Penalties, Part II

This is a continuation of the first post on trust fund recovery penalties.

Eric Anderson, an owner of three construction companies, was sentenced last June to 18 months in jail followed by 3 years of supervised release, and ordered to pay $1,080,222 in restitution to the IRS.  From 2006-2008, Anderson paid his employees under the table and failed to collect and to pay employment taxes on their wages to the IRS. Anderson also concealed his personal and business income by understating receipts in some years and in others, not filing tax returns at all. 

Identifying the “responsible person(s)”

If you are a business owner or other “responsible person” who fails to pay over employment taxes to the federal government, you can be held personally liable for the full amount — plus interest. A “responsible person” can be any person with the authority and control over the funds to be disbursed, including, but not limited to:

  • An officer, director, shareholder or employee of a corporation
  • A partner or employee of a partnership
  • A manager, member or employee of a limited liability company (LLC)
  • An employee of a sole proprietorship
  • A third party payer, payroll service provider, professional employer organization (PEO)  or client of a PEO
  • A board member of a nonprofit organization

If you are accountable for trust fund tax collection at a company and have the authority to determine where those funds will be directed, you may be a “responsible person” and could be personally liable for taxes that are not paid to the appropriate authorities. Note that an employee is not considered a “responsible person” if they pay the company’s bills at the direction of a superior staff person at the company. 

The TFRP does not require bad motive

If you pay other expenses of your business with trust fund taxes you will be deemed to be acting “willfully.” There need not be any bad motive or evil intent on your part-any responsible person who was or should have been aware of the outstanding taxes and intentionally disregarded (or was indifferent to) the law is subject to the IRC 6672 penalty. Note that these taxes are not dischargeable in bankruptcy.

It is crucial to ensure that you are fully compliant by making sure that you collect, account for and pay all employment taxes on time. These funds do not belong to you or to your company, and regardless of the financial situation they should never be used to pay for other expenses.

Professional and effective help for all your tax needs

The tax professionals at Moskowitz, LLP know how the federal and state tax systems operate and have strong relationships with auditors, tax officials and public officials throughout the United States. If you are in trouble with the IRS, a State or any other administrative agency, contact our office today. 

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