It is not surprising that during poor economic times, small businesses employ cost saving measures to keep up with operating expenses. One commonly used, but ultimately fatal, method is by using funds withheld from their employees' wages for Social Security, Medicare and income taxes instead of remitting them to the IRS. Although business owners may intend to borrow this money, it often leads to successive quarters of "borrowing", which is never repaid. In instances like these, the IRS assesses a penalty that is not dischargeable in bankruptcy on any persons responsible for collecting and remitting payroll taxes to the IRS.
This penalty, called the Trust Fund Recovery Penalty ("TFRP"), equals the amount of Social Security, Medicare and income tax withheld from its employees' paychecks. It is also called the "100% penalty" because a "responsible person" is penalized at 100% of the taxes that represent the total funds withheld and not remitted from the employees' paychecks. The amount withheld from an employee's paycheck is considered to be held in trust because the company first withholds these funds from their employees' paychecks and then remits them to the IRS.
To find a person to be "responsible," the IRS must fulfill both elements of knowledge and willfulness. With respect to "knowledge," the IRS must show that the alleged responsible party is an officer or member of the business who knew or had otherwise reason to know of the liability. Regarding "willfulness," the IRS must prove that this person had a duty to collect and remit the business' employment taxes. This could be in the form of also having check signing authority, having the ability to make FTD or deciding to favor other creditors over the IRS. Turning a blind eye or purposefully not wanting to know about the liability cannot exculpate one from this liability.
Although it can be tempting to use funds reserved for payroll taxes to pay other creditors or operating expenses, it can lead to problems with the IRS even after a business has closed down. You 0nly have 60 days to appeal a TFRP assessment. If you fail to appeal the assessment within this time, the probability of successfully contesting it is almost zero. If you find yourself in this situation, contact Kundra & Associates to assist.