Personal Liability for Unpaid Trust Fund Taxes

Trust fund taxes also called 941 taxes or employment taxes, must be withheld by an employer from an employee’s wages or salary and timely paid to the IRS. You hold them on behalf of your employees, hence the trust fund categorization.

If the trust fund taxes are not collected, accounted for and paid to the IRS, then the IRS may assess a trust fund recovery penalty against the person they deem liable. The penalty is equal to the amount of the taxes owed.

It’s a 100% penalty. So if the business owes $100.00 and the IRS says you have to pay it, then you owe the IRS $100.00. And they are going to do their best to get it from you or the business.

The IRS decides who is responsible for the 100% penalty. They use the following criteria in making their decision;

  • who is responsible for collecting, accounting for and paying the trust fund taxes
  • who acted willfully in not doing the above

The IRS defines willfully as “voluntarily, consciously, and intentionally”. So if you are the person the IRS is focusing on as the responsible person, they will be looking to see what your role is in the business and how you handled your responsibilities.

The people the IRS usually looks at are the;

  • owners
  • officers
  • partners
  • accountants and bookkeepers
  • those who direct or have authority to direct the spending of business funds

Once this penalty is assessed against the responsible person (maybe you?), the IRS may take all of your personal assets to satisfy the business debt they found you liable for. This could mean garnishing your personal bank accounts or your paycheck, or both.

What they can’t take is your exempt assets. But don’t expect the IRS to tell you what those are.

The easiest way to avoid this happening is to pay the taxes when they are due. From my experience, this isn’t always possible for a lot of business owners, especially small business owners. There always seems to be more pressing issues that require immediate attention. And quite often there are cash flow issues.

The IRS operates as a slow burn with each missed 941 filing and each missed payment, fanning the flames. It then erupts into a fire when you least expect it.

So how do you deal with it? Get experienced help. If you get caught in this situation it’s a buzz-saw of a problem.

Sources:

Could You be Personally Liable for Certain Unpaid Federal Taxes?

Employment Taxes and the Trust Fund Recovery Penalty (TFRP)