• Brian Barto, EA

What is a Trust Fund Recovery Penalty?

We help small businesses in Winchester, VA that have payroll tax problems.

There are a number of penalties that apply when an employer fails to pay the payroll taxes. These penalties are significant and include the following:

• Failure to File: The penalty for failure to file a Form 941 or Form 940 is 5% per month, limited to 25%;

• Failure to Pay: The penalty for failing to pay your payroll taxes is 0.5% per month, limited to 25%;

• Failure to Deposit Penalties: the penalty for failing to make federal payroll tax deposits depends upon the number of days late that the deposit is ultimately made:

o 2% penalty for deposits made 1 to 5 days late.

o 5% penalty for deposits made 6 to 15 days late.

o 10% penalty for deposits made 16 or more days late, but before 10 days from the date of the first notice the IRS sent asking for the tax due.

o 10% penalty for amounts that should have been deposited, but instead were paid directly to the IRS, or paid with your tax return.

o 15% penalty for amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier.

• Dishonored payment penalty: a penalty of 2 percent of the amount of the check or other commercial payment instrument generally applies if a check does not clear the bank. However, if the amount of the check or other commercial payment instrument is less than $1,250, the penalty is $25 or the amount of the check / other payment instrument, whichever is less.

As you can see, the penalties are significant and falling behind in paying the payroll taxes can be devastating to a business. Payroll tax debt quickly becomes very difficult to overcome. Not only does the business owe the back payroll taxes, but the penalties accumulate very fast.

To add insult to injury, under IRC section 6672, the IRS can also go after employees and business owners to recover back payroll taxes. This is called the Trust Fund Recovery Penalty. This penalty is referred to as the 100% penalty. It is a penalty in lieu of the taxes that were not withheld. This means the penalty is used to collect the actual tax itself, not an addition to the tax. There is frequently some confusion with this penalty. Many think that it “doubles the tax.” It does not. It is merely an alternative way for the IRS to collect the payroll tax from the owner or “any responsible person” in the business.

It is easy to understand why it is such a big deal to the IRS when an employer fails to pay-over the payroll taxes. The reason is because the unpaid payroll taxes act as a double-hit to the government.

• The government will be required to issue refunds to the employees who file their 1040 income tax returns despite the fact the IRS never received the funds, and

• The employees will need to be credited for their social security earnings, again, despite the fact the IRS never received the money.

Given that withholding from employee paychecks accounts for more than 70% of the revenue into the United States government, it is easy to see why the IRS is aggressive about trying to protect this critical source of funds.

At Tax Debt Resolution Services of Winchester VA, our mission is to help you eliminate your IRS issues and the stress the IRS has created in your life and help you get back to doing what you do best! We help our clients in Winchester VA, Strasburg VA, Martinsburg WV and Charles Town WV to resolve their tax debts!. If you need assistance please feel free to contact me at 540-300-1988 or

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