What is a trust fund penalty & How to Settle it

A tax trust penalty is a sanction from the IRS for not remitting the employee’s fund entrusted to your care.

As an employer, the IRS requires you to withhold a part of your employee’s wages to pay income taxes, Social Security, and Medicare taxes. You get penalized by the IRS if you withhold income tax, Medicare, and Social Security payments from your employees’ paychecks but do not remit the funds to the IRS.

 Tax Trust Penalty is one of the IRS’s most severe penalties. The IRS takes it very seriously, and if you are found to be responsible for the missing payments, the agency will not hesitate to seize your assets to redeem their funds.

The trust fund recovery penalty is also known as the “100% penalty” because the penalty is equal to one hundred percent of the total amount of taxes that the employer failed to withhold and pay to the IRS—which can be a huge sum.

Note: According to the IRS, you can be held personally accountable for the whole amount of the unpaid trust fund tax, plus interest, if you are the person in charge of withholding, accounting for, depositing, or paying specific taxes, such as NRA withholding and employment taxes, and you willfully fail to do so.

 An officer of a company, a partner, a sole proprietor, or an employee of any business can all be responsible for this purpose. A trustee or agent with access to the business’s funds may also be held accountable for the fine.

What is considered Willful?

The IRS sees your behavior as willful when you yield to business pressures and pay bills/obtain supplies rather than paying withheld taxes. And simply delegating responsibilities to others does not absolve you of responsibility. Your failure to take care of the job yourself may be considered willful.

If you are a small business, trust funds can be a trap for you if you are not careful. It is easy to fall into the temptation of diverting the fund to do some other “urgent” business. 

Small businesses that are short on cash may “borrow” the taxes they must withhold and pay to the IRS. This is not a wise thing to do at all. Try as much as you can not to give in to this temptation.

How to settle the tax trust penalty

Thankfully, like other tax liabilities, this penalty has payment options, and you can resolve it. The first step after seeing the IRS notice is to reach out to them and work out a payment plan.

You can apply for a payment plan or an installment agreement if you do not have the entire payment. You can also try to settle your taxes for less than you owe using the Offer in Compromise program or a Partial Payment Installment Agreement (PPIA).

Offer in Compromise Program.

An Offer In Compromise (OIC) program is a scheme designed by the IRS that allows you to pay less federal tax debt than you owe. 

An IRS OIC will enable you to submit a proposal that is less than the whole tax debt. You pay less than what you owe, and the IRS cancels the remaining tax liability if the IRS approves your offer. 

The OIC program is usually at the federal level. Although, many states also make this option available to taxpayers.

To be considered for the OIC, you must have filed all of your tax returns; received a bill for at least one tax debt that is covered by the offer; paid all required estimated tax payments for the current year, and, if you are a business owner with employees, paid all required federal tax deposits for the current quarter and the two prior quarters.

According to the IRS, taxpayers who can fully pay the liabilities through an installment agreement or other means generally won’t qualify for an OIC in most cases.

This program has three options: Doubt as to collectability (most popular), Doubt as to liability, and Effective/Fair Tax administration. Each of these options also has its eligibility criteria. You must also meet the eligibility requirements for the type of offer you want.

Partial Payment Installment Agreement.

A Partial Payment Installment Agreement (PPIA) is an IRS settlement that enables you to pay back your tax debt over a certain period by making monthly payments. When you opt for a Partial Payment Installment Agreement (PPIA), you pay the IRS every month. However, you end up paying less than you are required to because some of your tax bills expire before your payment agreement ends.

To qualify for PPIA, you must have filed all past tax returns, not had an OIC accepted, are not in bankruptcy, owe over $10,000, and have no assets or cannot access the equity in your assets.

To conclude, if you get penalized by the IRS, do not draw back from contacting them immediately. A reputable payroll tax service is an excellent way to ensure that your payroll taxes are filed correctly and on time. However, even if you use a payroll tax service, you will still be personally liable if your taxes are not paid on time. Therefore, the IRS suggests that you, as an employer, maintain your company address on file with the IRS rather than the address of the payroll service provider, so that the IRS can contact the company if there are any issues.

Are you searching for an IRS-licensed tax preparer? You should look no further. EnrolledAgent.com is an IRS Enrolled Agent lookup where you can easily search and connect with a tax professional for your tax services. Our listing comprises solely IRS-certified tax professionals who render all tax consultancy services. Should you be faced with serious tax problems such as an audit, the Resource Center has several IRS Audit tips that can help you pull through.


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