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Employers: Don’t Underestimate the Risks of a Trust Fund Recovery Penalty Audit

Posted in Offshore Account Update on March 18, 2022 | Share

Employers of all sizes have an obligation to withhold income and FICA taxes from their employees’ paychecks and remit the withheld funds to the Internal Revenue Service (IRS). When employers fail to meet this obligation, they can face the IRS' Trust Fund Recovery Penalty (TFRP), and they can face additional criminal penalties in some cases.

But, employers aren’t the only ones that can face these consequences. The IRS also holds individuals liable when they “willfully” fail to remit trust fund taxes on a company’s behalf. With this in mind, employers need to take Trust Fund Recovery Penalty audits very seriously, as Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, discusses below:

Trust Fund Recovery Penalty Audits Can Be Dangerous for Employers

The IRS conducts Trust Fund Recovery Penalty audits to catch employers that have withheld employees’ income and FICA taxes and then used these funds for other purposes. While this often involves employers paying other creditors in order to keep their businesses afloat, the IRS has made clear that this is not a legitimate – or legal – use of employees’ funds held in trust.

For employers targeted in these audits, the costs can be substantial. For income and FICA taxes, the Trust Fund Recovery Penalty is calculated based on the amount of the taxes withheld and not remitted to the IRS. In other words, not remitting trust fund taxes to the IRS on time doubles employers’ liability. If the evidence uncovered during an audit suggests that an employer failed to remit trust fund taxes intentionally (i.e., if the employer used withheld funds to pay other creditors), then the employer can also face criminal prosecution for tax fraud under the Internal Revenue Code. 

Trust Fund Recovery Penalty Audits Can Also Be Dangerous for Employers’ Personnel

In addition to targeting companies with the Trust Fund Recovery Penalty (and criminal charges), the IRS also targets the individuals involved. As noted above, officers, directors, shareholders, partners, accounting personnel and others can also be held liable for the TFRP if they “willfully” participate in an employer’s failure to remit income and FICA taxes as required. For purposes of the TFRP, the IRS takes the position that an individual acts willfully if he or she:

  • “Must have been, or should have been, aware of the outstanding taxes and
  • “Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).”

If an individual’s conduct is deemed to be intentional, he or she can also face criminal prosecution for tax fraud. While employers can face substantial fines if found guilty of tax fraud, individuals can face both fines and imprisonment.

Request an Appointment with Washington D.C. Tax Lawyer Kevin E. Thorn

Washington D.C. tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, represents companies and individuals facing Trust Fund Recovery Penalty audits and their consequences. If you would like to speak with Mr. Thorn about your situation, call 202-349-4033, email ket@thornlawgroup.com or request an appointment online today.

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