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Employment Taxes and the Trust Fund Recovery Penalty (TFRP)

The Internal Revenue Service cautions employers to collect and pay trust fund taxes as required by law.  “Trust Fund” taxes are withheld income, social security and Medicare taxes.  These monies are withheld from the salary payments of employees and paid over to the government by employers. 

Most employers must withhold, deposit, report, and pay employment taxes on wages paid to their employees and must file Form 941, Employer’s Quarterly Federal Tax Return. For employment tax purposes, wages are defined as all pay to an employee for services performed.  It includes salaries, vacation allowances, bonuses, commissions, and fringe benefits.

In addition, an employer may be required to make Federal Tax Deposits of the employment taxes.  The IRS recommends making deposits through the Electronic Federal Tax Payment System (EFTPS).  EFTPS is safe and secure and over 4 million taxpayer use it pay their taxes. Enroll and use EFTPS to be eligible for a penalty refund and avoid future penalties.  Visit IRS.gov for more details.  If that is not possible, deposit may be made using the Federal Tax Deposit Coupon, Form 8109 with an authorized financial institution. Visit the IRS Web Site at www.eftps.gov for more information on electronic payment. 

When an employer does not pay the trust fund taxes, and actions by IRS to collect these taxes are not successful, the responsible officers may be held personally liable for these taxes through the TFRP.  The IRS uses the TFRP to facilitate collection of the trust fund portion of taxes.  Section 6672(a) of the Code allows the Internal Revenue Service to reach the personal assets of responsible persons who do not withhold and pay to the government amounts required to be withheld. 

The TFRP applies if income, social security and Medicare taxes that must be withheld are not paid by the person or persons responsible for the collection of trust fund taxes. The TFRP is a civil penalty assessed against a responsible person for failure to collect and pay over to the Government, withheld and collected taxes.  The amount of the penalty is equal to the unpaid balance of the trust fund tax. 

The TFRP can be avoided by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required. Make required tax deposits and payments on time. Additional information on employment taxes can be found in Publication 15, Employer's Tax Guide, and Form 941, Employer's Quarterly Federal Tax Return.  Additional penalties may apply if the required deposits are not made on time, if they are for less than the required amount, or if EFTPS is not used when required.     

 

For additional information on who may be held responsible for the TFRP visit http://www.irs.gov/businesses/small/article/0,,id=108357,00.html