Payroll Taxes and Personal Responsibility | What is a Trust Fund Recovery Penalty

Payroll taxes is the number one reason why businesses and their owners get in trouble with the IRS. Given that most businesses fail due to cash-flow deficiencies, it should not surprise you that when money gets tight the taxes collected and withheld by the business get spent to keep the business operating. The owners hope that once revenue picks up, they will get caught up and pay the taxes. It has been said that payroll taxes are the easiest loan to take, but the hardest to pay back. Easy because there are no loan documents to prepare and no permission to ask. It is the hardest to pay back because of all of the penalties and interest associated with payroll tax debt.

When we mention the Trust Fund Recovery Penalty, which taxes are considered as the “trust fund” taxes? The answer is; the income tax and Federal Insurance Contributions Act (“FICA”) taxes that are withheld from each employee’s paycheck by the employer and paid over to the United States Government. (FICA consists of a 6.2% tax for Social Security and a 1.45% tax for medicare). The IRS is very serious about collecting on back payroll taxes. There is a good reason for this. Payroll taxes are a significant stream of revenue for the United States Government. In fact, the total taxes paid over by employers on behalf of employees represent more than 72% of all the taxes collected by the United States Government. This is why recovery of delinquent payroll tax payments is a significant issue pursued aggressively by the IRS.