Federal tax law requires employers to withhold certain taxes from their employees’ wages, and to remit those amounts to the IRS. These are known as “trust fund” taxes, since the employer holds them in trust for the employee. In the event an employer fails to withhold these taxes, or fails to remit them, the consequences can be significant, so a conversation with a Pennsylvania tax attorney can be beneficial for all involved. The Trust Fund Recovery Penalty (TFRP) is one of the largest penalties authorized by the Internal Revenue Code (IRC). The COVID-19 pandemic has harmed businesses in Pennsylvania and all over the country. Despite the difficulties many employers are facing, the IRS is unlikely to offer any latitude in the payment of trust fund taxes.
What Is the Trust Fund Recovery Penalty?
Section 6672 of the IRC allows the IRS to assess and collect a penalty from anyone who is obligated to collect and pay trust fund taxes when they “willfully” do the following:
– Fail to collect the required tax;
– Fail to “truthfully account for and pay over such tax”; or
– Try “to evade or defeat any such tax or the payment thereof.”
The penalty is equal to the total amount of tax that the person failed to collect, failed to account for and pay, or attempted to evade.
What Taxes Are Covered by the Trust Fund Recovery Penalty?
Trust fund taxes commonly include personal income tax and the taxes that go towards Social Security and Medicare under the Federal Insurance Contributions Act (FICA). Employers must withhold an estimated amount of each employee’s wages for federal income tax, based on information provided on Form W-4. FICA requires employers to withhold 7.65 percent of an employee’s wages from each paycheck — 6.2 percent for Social Security and 1.45 percent for Medicare. Most employers must submit withheld amounts every month, and file quarterly returns with the IRS.