The trust fund recovery penalty is a penalty that is given to an entity that is not directly responsible for a tax but is responsible for paying the IRS the taxes that are owed to the IRS by a third party. For the trust fund recovery penalty to be viable the person must be responsible for collecting, accounting for and paying that tax over to the IRS. Next that person must fail to pay the IRS the tax that it collected and accounted for. Both of these things need to take place in order for the IRS to assess a trust fund recovery penalty.
IRS Trust Fund Recovery Penalty Liability
The usual situation that occurs is an employer will fail to collect and pay over to the IRS income tax that was withheld from employees pay. The taxes that are supposed to be paid over to the IRS are social security taxes which are sometimes referred to as trust fund taxes. If you are an employer it is very important that you do not forget to pay these taxes to the IRS.
Understand that just because you collected the tax from your employees does not always mean that you are the responsible party to pay the IRS the taxes that are owed. There are some situations where a bank, a creditor, supplier or contractor could be liable because they are the controlling party of the finances of a company. If this is the case, that entity will be the one responsible to the IRS for paying the trust fund recovery penalty.
Keep in mind that even though it is called a trust fund recovery penalty it is actually not an additional penalty on top of the taxes already owed. The trust fund recovery penalty is just a way for the IRS to determine who is responsible for paying payroll back taxes and pursuing that individual for the whole tax including interest and penalties.
Relief for Employees
If your employer has not paid the IRS for taxes that you owe but have had withheld from your pay check do not worry. The IRS does not hold employees responsible for the actions of an employer who fails to turn over funds that they were responsible to pay. The IRS understands that you are not the one that has failed to pay the tax and will only pursue your employer for these types of back taxes.
It is important not to delay paying the IRS because they will aggressively pursue your business if you continue to become delinquent on your payroll tax obligations. In some cases they will not allow you an installment agreement and begin to levy assets from your business to cover the tax liability. If your business decides to submit an offer in compromise it must be in full compliance by timely filing and depositing taxes either before or during the investigation to determine whether you qualify for an offer in compromise. If you do not do these two things the IRS will simply return your application.