Trust Fund Recovery Penalty
When a business withholds income taxes and social security taxes from an employee’s paycheck they are known as “trust fund” taxes because once they are paid to the government by the employer they are held in trust by the government to be used when needed. Sometimes businesses fail to send these withheld taxes to the government. Often times this is not done with the intention to steal the money or carry out some other illegal, nefarious, plan, but it is normally an oversight or a symptom of difficult times.
Regardless of the reason, if you owe unpaid payroll taxes the IRS will aggressively pursue you in an effort to collect them. These collection efforts can include pursuing the company owners and anyone (including employees) that played a part – or made a decision – that led to these taxes not being paid.
One tool the IRS uses to collect these taxes is the TFRP or Trust Fund Recovery Penalty. In many situations corporate officers, stockholders and employees are protected against personal liability involving the debts of their corporations. A TFRP breaks down that protection and allows the IRS to go directly after those responsible for the non-payment of the taxes.
These penalties can often be very large and unlike personal income taxes owed they cannot be discharged during a bankruptcy. Because of the seriousness of a Trust Fund Recovery Penalty it is imperative that you work to avoid this from happening, however, if you have received a TFRP there are still options out there for you.