The Trust Fund Penalty

• Posted on June 14, 2010
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The IRS is empowered to assess a penalty against individuals who are deemed responsible for the willful failure of the business to remit payroll taxes.  This penalty is called the Trust Fund Penalty because it imposes a fine that is equal to the portion of the payroll taxes that was withheld from employees’ pay and held in trust but unpaid to the government.  The IRS often assesses the Trust Fund Penalty against people within the organization who were neither shareholders nor officers. While case-after-case has resulted in the courts being unwilling to apply any “reasonable cause” exceptions to the penalty, in some situations, individuals have been successful in proving that they are not a responsible person, and therefore, not subject to the penalty.  

The Trust Fund Penalty may be assessed against more than one individual.

Additional Note: Payroll taxes (Trust Fund) refer to the amounts withheld from employees’ compensation for income tax, Social Security tax and the Medicare tax.  The employer’s share of Social Security tax and Medicare tax, as well as FUTA (federal unemployment) tax and other taxes owed by the employer are not part of the trust fund penalty amount.

Again, failing to properly file and pay payroll taxes is a serious matter.  Not only can the IRS go after the company's assets but, in certain circumstances, it can also go after owners, officers, and certain employees.  This means that if you, or someone else within your business, are found to be willfully responsible for the business's failure to pay payroll taxes, you could be held personally liable for a portion of the tax up to and including very stiff fines and possible incarceration.

The IRS must first make an investigation and, assuming it makes an assessment against you or other employees of your company that isn’t paid, it can then begin collection efforts aimed at the responsible person’s personal assets.  This would include bank accounts, property, and other items of value.  In some cases, the IRS may liquidate the company and sell its assets in order to satisfy the tax debt; meaning they can and will shut down your business to satisfy your tax obligation.