What is the Trust Fund Recovery Penalty?
The Trust Fund Recovery Penalty is based on the Internal Revenue Code Section 6672 which states that:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfuly pails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax on the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
What does all that legal mumbo-jumbo mean? Well it basically means that if you participate in a business that is required to collect, report and pay income taxes for its employees you are required to collect, report and pay those income taxes. While that sounds obvious, a lot of times, businesses are faced with the fact that because of their current cashflow situation, they can either pay their employee’s income taxes to the IRS or they can pay their employee’s payroll to the employee.
If you fail to collect, report and pay those withheld taxes, the IRS may assess the trust fund recovery penalty against you and you will be liable for the "trust fund" portion of those income taxes.
The purpose of the trust fund recovery penalty is two-fold according to the Internal Revenue Manual:
- The first purpose is to encourage the prompt payment of withheld and other collected (trust fund) taxes; and
- Second, to facillitate collection of such taxes from secondary sources.
Many times, the IRS will not be able to collect the taxes from the business because the business has failed and shut down, however if the payroll taxes were not paid, other people will be liable for at least the trust fund taxes and the IRS may attempt to collect those taxes from them personally.
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