Much to the surprise of many business owners and those involved in financial operations, the IRS will hold responsible individuals personally liable for employee withholding taxes not turned over to the government. The entity — be it a corporation, limited liability company, or limited partnership — does not offer any protection against personal liability for these taxes.
Such withholdings are held in trust for the federal government, hence the name trust fund. When the business is unable to remit these taxes, the IRS will go after those they deem responsible and assess the amount of the unpaid withholding tax in the form of a penalty, known as the Trust Fund Recovery Penalty (TFRP). The IRS will assess each responsible person 100% of the TFRP; they will not prorate it. However, once the total is collected from any source, all parties are relieved of the liability.
In a report by TIGTA, they reviewed 256 TFRP cases and found that enforcement actions were “untimely and/or inadequate,” compromising the IRS’ ability to collect. TIGTA recommended various steps for the IRS to take to bring heightened awareness to TFRP cases. As the IRS has agreed with the various recommendations, this will assuredly lead to a greater level of successful TFRP enforcement.
If your business owes payroll taxes, now is the time to make sure you have proper representation. Please contact Larry Rubin, CPA, Aronson’s tax controversy practice lead, at 301.222.8212 for further information or to discuss your specific situation.