- Withholding Trust Funds
- Trust Fund Penalty
- Responsible Persons
- Misapplication of Trust Funds
When an employer withholds Social Security and income taxes from an employee, those funds are the property of the government, and the employer must hold those funds in “trust” until the funds are turned over to the government. Failure to do so could lead to the so-called trust fund penalty, which is equal to 100% of the withholding from the employees’ wages. The penalty applies to any willful failure to collect, account for and pay over Social Security and income taxes required to be withheld from employee wages.
The Treasury Inspector General for Tax Administration has made recommendations to the IRS for timely assessing and collecting the responsible person penalty, and the IRS is adopting the recommendations. The government has always been very aggressive about collecting trust fund penalties and will pursue collecting the penalty from the “responsible person.” This is where you may be at risk.
The IRS broadly defines a “responsible person” to include corporate officers, directors, and shareholders under a duty to collect and pay the tax as well as a partnership's partners, or any employee of the business under such a duty.
So, if you are a person with the power to see that the taxes are paid, you may be responsible. Frequently more than one person is a responsible person, and each one is at risk for the entire penalty. Even though you may not be directly involved with the withholding process, if you discover that trust funds that are due to the government are instead being used to pay a business creditor, you become a “responsible person.” You always have to keep in mind that the trust fund money belongs to the government and bowing to business pressures to pay bills or obtain supplies instead of transmitting the withheld taxes to the government will be viewed as willful (bad) behavior for purposes of the penalty.
Unlike some other types of penalties, there are no acceptable excuse for failure to withhold the required payroll taxes or for borrowing withheld amounts to pay other expenses. Even if you have a payroll company collecting and paying over the withholding, and that firm should go belly up, or someone in that firm absconds with the trust finds, guess who is still responsible for paying the government? The responsible person at the business, of course!
Don’t fall victim to the penalty by allowing a partner or corporate superior to persuade you not to withhold or timely pay over the trust funds to the government. If you are interested in discussing your potential risks and exposure to this penalty, please give this office a call.