When you are a business owner and your business has employees, you are required to withhold income taxes from your employee’s paychecks and make regular deposits of those taxes with the IRS. If you miss those tax deposits or fail to pay at all, your business is looking at some stiff penalties. If your business is unable to collect, or for no other reason except to give the IRS more people to collect those taxes from, the IRS may assess the "trust fund" portion of those withholdings against you personally. The IRS may assess the trust fund recovery penalty against anyone who has authority over the company finances and would determine who gets paid and who does not. Meaning, if you or another employee gets to make the decision that the company will pay the power bill this month rather than making the tax deposit, the IRS can assess the trust fund recover penalty against that person.
How do they enforce that penalty? The same as they would when trying to enforce any other type of tax liability. First they would give you an opportunity to full pay or set up a payment plan. If you refuse to do that (or cannot) they will begin enforcement action that includes wage levies, garnishment of bank accounts, down to the worst types of enforcement action like seizing your home and other personal property.
You can negotiate with the IRS to reduce this amount with an offer in compromise just like if you had other personal tax liability. The main distinction between personal tax liability and the trust fund recovery penalty is that the trust fund recovery penalty cannot be discharged in bankruptcy so it will be hovering over the taxpayer until it is paid in full by the taxpayer, the company or until the collection statute of limitations expires.
If you are facing having the trust fund recovery penalty assessed against you or it already has been and you don’t know how to approach the IRS next or what your rights are, please give me a call today to set up your free consultation.