Trust Fund Recovery Penalty

In case you do not know what this is, I will give you a brief definition:

Corporations, Limited Liability Co, Limited Partnerships are entities unto themselves. These entities are responsible for the collecting and paying of the taxes that are being withheld from the employees’ paycheck. When   these payments are not made, the IRS looks at the Officers and key employees of the entity for these payments. The trust fund is one of the cases where the corporate veil is broken. If one or more people are found responsible for the payments not being paid, the actual amounts not paid will be assessed to those individuals.

Trust fund penalty is really not a penalty, but the actual taxes that were to be paid. When assessed to the individual, no penalties or interest are charged to the individual accounts, just the tax. After assessment, the interest does start to accrue.

That being said, the IRS looks at the trust fund that was not turned over to them as embezzlement.  The Bankruptcy Court feels the same way as you are not allowed to discharge this assessment in Bankruptcy Court.

Any person who is charged with this penalty has the potential of being charged criminally.

Prior to being charged with this penalty, a trust fund interview must be given by the Revenue Officer. It may be a good idea, since there are criminal implications, depending on the circumstances, the taxpayer may want to evoke their Fifth Amendment rights.

The good news, the statue of limitations for assessing the trust fund penalty is three years from the date the applicable return was filed or three years from April 15th of the succeeding calendar year. If this date is missed, the penalty cannot be assessed against those involved.

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