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What Is A Trust Fund Penalty Tax?


The Trust Fund Penalty Tax generally can occur when an employer fails to remit payroll taxes to the IRS.  The Trust Fund Tax is the tax withheld from the employees' wages.  It is the employees' federal income tax withheld and the employee's portion of social security tax and Medicare tax withheld by an employer and held in trust until paid to the IRS.  It is not the employer's matching portion of the social security tax and Medicare tax.


When an employee is paid, the employer does not pay to the employee all the money the employee has earned. The employees' federal income tax withheld and the employees portion of social security tax and Medicare tax withheld by an employer are part of the employees' wages that the employer must pay to the IRS instead of to the employees.  Through this withholding, the employees pay their contributions toward retirement benefits such as social security and Medicare and the income taxes reported on their tax returns.


The employees' trust fund taxes, along with the employers' matching share of FICA, are paid to the IRS through the Federal Tax Deposit System.  The withheld portion of these taxes is the employees' money and not the employers money.  This is why the IRS takes such a dim view of, and aggressively pursues unpaid payroll taxes. 

Who Is Responsible For The Trust Fund Penalty Tax


The employer is and remains responsible for all of the unremitted payroll tax.  This includes the employees' trust fund taxes, along with the employers' matching share of FICA. 


The individuals responsible for the unremitted payroll taxes become personally liable for the employee's portion of the unremitted payroll taxes through the imposition of the Trust Fund Penalty Tax.  Once the Trust Fund Penalty Tax is asserted, the IRS can take collection action against the individual's personal assets and can file a federal tax lien or take levy or seizure action against that individual personally.


The Trust Fund Penalty may be assessed against any person who is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and willfully fails to collect or pay them.  A responsible person is an individual or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be an officer or an employee of a corporation, a member or employee of a partnership, a corporate director or shareholder, a member of a board of trustees of a nonprofit organization, another person with authority and control over funds to direct their disbursement, or another corporation.  The IRS will seek to collect the unpaid taxes from anyone who could be considered responsible for running the company, particularly those who made the financial decisions or handled the books or signed the checks.


For willfulness to exist, the responsible person must have 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).  Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.


Assessing The Trust Fund Penalty Tax


The IRS will provide a person it deems to be a responsible person with a letter stating that the IRS plans to assess the Trust Fund Penalty Tax.  The person has 60 days (75 days if the letter is addressed to the person outside the United States) from the date of the letter to appeal the proposed assessment.  If the IRS determines that the person is a responsible person or if the person does not respond to the letter, the IRS will assess the penalty and send a Notice and Demand for Payment.


Compliance! Compliance! Compliance!


The importance of being current, or being in voluntary compliance, cannot be overstressed.  Not being in compliance can derail the entire settlement process, whether you are trying to discharge tax debts through the filing of an Offer in Compromise, or by entering into an Installment Agreement.  Payroll tax returns that have not been filed or taxes for the most recent quarters that have not been paid create a multitude of problems. Namely, the IRS will not allow a business to continue to operate if it does not remain current.


Get A Game Plan!


The Trust Fund Penalty Tax can, in many instances, be avoided through careful planning.  It is important to have a well devised plan for discharging tax indebtedness and almost impossible to achieve without the help of an experienced professional who understands the process or various processes that may be involved, what is possible and what is not, and the full range of remedies available.  As an attorney with over 30 years in tax practice, John Kachmarsky and the staff at the Law Office of John Kachmarsky have that experience and knowledge


Contact our Charleston, South Carolina law office today to make an appointment for an initial consultation.



Charleston Tax Attorney, John Kachmarsky, and the Law Office of John Kachmarsky provide legal services in the areas of Asset Protection, LLC (Limited Liability Company) Formation, Business Formation, Contracts, Conservatorships, Powers of Attorney, Estate Administration, Probate, Estate Planning, Wills, Trusts, FINRA Disputes, Securities Losses, Income Tax, Tax Planning, Tax Controversy, Tax Litigation, Tax Settlement, and Offer in Compromise to individual and business clients in Charleston and throughout South Carolina and the U.S. including communities such as North Charleston, Summerville, Mt. Pleasant, Hilton Head Island, Myrtle Beach, Georgetown, Florence, Beaufort, Moncks Corner, Goose Creek, Isle of Palms, Daniel Island, James Island, Charleston County, Berkeley County, Dorchester County, Beaufort County, Horry County, Georgetown County, Florence County and Colleton County.

John Kachmarsky is a Charleston Tax Attorney with a Master of Laws Degree in Taxation.  Charleston Tax Attorney, John Kachmarsky, is licensed to practice law in South Carolina and Georgia and represents clients before the Internal Revenue Service and the United States Tax Court.

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