Imagine being a partner in a business that employs several dozen people. You have a competent payroll team that works alongside a payroll services provider to process payroll and ensure that taxes are withheld and paid. Everything is moving along fine until you get a call from your local IRS office inquiring about missed payroll taxes. Before you know it, you are being penalized by the government for failure to pay.
The scenario described here is very real to U.S. businesses that do not keep all their payroll ducks in a row. Thanks to something known as the Trust Fund Recovery Penalty (TFRP), business owners and their appointed representatives can be held liable for unpaid payroll taxes whether they had direct responsibility over them or not.
In the simplest possible terms, the law recognizes that anyone with responsibility for collecting and/or paying payroll tax who willfully fails to do so is subject to the TFRP. The law also recognizes that all company owners and directors automatically qualify. This is because they are ultimately responsible for every decision made by, or on behalf of, the companies they run.
Practical Application of TFRP
To fully understand the practical application of TFRP, consider a recent case detailed in a column written by Accounting Web's Ken Berry. The case was decided by an IRS ruling back in July.
Berry explained that the case revolved around two co-owners of a tool and die company. One co-owner acted as the CEO while the other filled the role of COO. The latter accepted all responsibility for payroll processing and tax reporting.
To make a long story short, the COO was eventually laid off and then fired. It was discovered that he was not remitting payroll taxes, thus triggering an investigation by the IRS. Even after his firing, the company missed several tax deadlines in the hope that they could catch up later.
The IRS imposed the TFRP on the CEO on the basis that he shared ultimate responsibility for withholding and paying the taxes as a co-owner. Furthermore, he willfully neglected to do so even after the initial investigation proved the COO had not been doing his job. The result for the CEO was liability for all unpaid taxes as well as accrued penalties.
No Exception for Outsourced Payroll
One of the most important aspects of this case is the fact that the company in question used a third-party payroll provider to process paychecks. That service provider was ultimately found not liable because their only contribution to the company's payroll system was creating and issuing paychecks. But even if that provider had been offering a full-service solution, the ultimate responsibility for payroll tax withholding and submission lies with company owners and directors.
The lesson here is that each of our clients should be checking up on us to make sure we are correctly withholding payroll taxes and making tax deposits in a timely manner. We always do so, but our clients should never take us at our word. If something goes wrong, it will be on them rather than us.
If you are the owner of a small business, you are responsible for making sure payroll taxes are withheld and submitted. If you are a co-owner, company director, or other designated representative with payroll authority, you also share the responsibility. Bear in mind that the TFRP does not discriminate. Anyone in a position of responsibility who willfully neglects payroll taxes could be held liable in the event of a failure to remit said taxes on time.
Accounting Web – https://www.accountingweb.com/tax/irs/tax-court-avoiding-the-dreaded-trust-fund-penalty