Could You Be Held Liable for Trust Fund Penalties?

On: April 26, 2023

How should an employer handle payroll matter in their company? Employers can handle this process themselves internally through their own payroll department, or they may use a remote or outside vendor who provides the payroll services to the employer. This outside vendor or remote payroll servicer may be in the same state or across country. The taxes are considered trust fund taxes because you as an employer hold the employee’s money in trust until you make a federal tax deposit in that amount. The Trust Fund Recovery Penalty may apply to you in cases where the unpaid trust fund taxes cannot be immediately collected from the business. The responsible person is the person or group of people who have the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.

As an employer, what is the normal process? Employers can take advantage of filing their Employer’s Quarterly Federal Tax Return, IRS Form 941 and making their federal tax deposit payments online electronically. The Internal Revenue Service has stated that federal tax deposits must be made by electronic funds transfer (EFT) by using the Electronic Federal Tax Payment System otherwise known as EFTPS.  The filing of the Employer’s Quarterly Federal Tax Return is prepared for each quarter and filed by the last day of the following month. So, for January to March, the IRS 941 Report is due by April 30^th.  To avoid the Trust Fund Recovery penalty being imposed by the Internal Revenue Service, employers must file the Employer’s Quarterly Federal Tax Return timely each quarter by the deadline dates of March 31^st, June 30^th, September 30^th and December 31^st.  For each quarter payments are due on or before one month after each quarterly period.

Who is considered a Responsible Party? In the eyes of the Internal Revenue Service, an individual can be considered a responsible person if you are an officer or member of a board of directors, an active person in management in the day-to-day financial affairs of the company or have actual authority over how the company’s finances are disbursed. An individual who owns shares or a stake in the company, one who makes decisions regarding what order debts or taxes will be paid, and one who can hire, or fire employees can also be considered a responsible person. To avoid this penalty, one must never borrow or use funds intended to be used for federal tax payments.  The Responsible Party can be changed by filing an IRS Form 8822-B where another person can be tasked with the responsibility for payroll, taxes, and monitor the company compliance with IRS and state tax and payroll.

How can an employer check on the status of their tax reporting?  The employer can do this themselves if they have a small company, but normally when a company grows, they will need to hire a payroll manager or tax matters partner to stay on top of your internal or external payroll function, following up with the IRS by checking all transactions processed through EFTPS and the business bank account will avoid the Trust Fund Recovery Penalty letters.  This would be a trusted individual with experience in banking, financial services or accounting. It can also be a tax preparer, CPA or Enrolled Agent. The Leading Tax Group has former IRS accountants on staff, and they can quickly resolve whatever payroll or tax reporting issues the company may have encountered. It is always prudent and wise to get professional help when dealing with the IRS or state tax authorities.