Payroll taxes provide funds that are used to fund federal programs like Medicare and Social Security, and they are deducted from workers’ paychecks and paid to the Internal Revenue Service. They are often referred to as trust fund taxes because employers hold the money in trust. To ensure that employers in Texas and around the country submit payroll tax payments promptly, Congress created the Trust Fund Recovery Penalty.
The TFPR is assessed against responsible parties and not the companies they work for. This means that employees can be personally liable for unpaid payroll taxes. The IRS examines the duties the individual performed to determine whether or not they are a responsible party. Employees who simply follow their supervisor’s instructions when paying bills would not be considered a responsible party. The IRS notifies people it has determined are responsible parties by mail. If the agency receives no reply after 60 days, it assesses the TFRP and sends the individual a demand for payment.
The TFRP is often assessed against individuals who work for companies that recently went out of business, but it can also be used to secure payment from individuals at firms that are still operating if they willfully refuse to pay. To determine willfulness, the IRS must only establish that people responsible for paying payroll taxes disregarded or were indifferent to the law. One example of indifference is paying creditors other than the IRS with funds that are held in trust. Proving malice is not required.
Appealing the IRS determination
Those who receive a letter about the TFRP from the IRS would be wise to take the matter seriously as the agency pursues unpaid taxes vigorously. Instead of ignoring the letter, they should consult with an experienced tax attorney who could explain the process for appealing the IRS determination. The best way to avoid these issues is to make sure that payroll taxes are submitted on time.