IRS Audits and the Trust Fund Recovery Penalty: What Employers in Boston Need to Know

Federal law requires employers to withhold income taxes and Social Security and Medicare contributions (also known as FICA taxes) from their employees’ paychecks. When employers withhold these taxes, the funds are held in “trust” until the employer pays them to the IRS on the employee’s behalf. As Boston tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, explains, failure to pay these funds to the IRS when due can lead to substantial penalties for the companies and individuals involved—and even criminal prosecution in some cases.

The IRS Routinely Audits Employers for Trust Fund Tax Violations

Due to widespread underpayment of income and FICA taxes, the IRS routinely audits employers for trust fund tax violations. When conducting these audits, the IRS is looking not only for evidence of underpayment but also for evidence of which specific individuals were involved.

Non-Payment Can Lead to the Trust Fund Recovery Penalty

Underpayment (or nonpayment) of trust fund taxes can result in liability for the IRS’ Trust Fund Recovery Penalty (TFRP). When an employer fails to pay trust fund taxes to the IRS, the TFRP is calculated based on the unpaid balance. This includes both the amount of unpaid income tax withheld and the employee’s portion of unpaid FICA taxes.

Critically, the IRS imposes the TFRP not only on employers, but also on the individuals, or “responsible persons,” involved. As the IRS explains:

“The TFRP may be assessed against any person who: [i]s responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and [w]illfully fails to collect or pay them. “

The IRS goes on to explain that a responsible person, “is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.” This includes corporate officers, accounting personnel and third-party payroll service providers, among others.

Non-Payment Can Also Lead to Criminal Prosecution for Tax Fraud

In addition to facing liability for the TFRP, companies and responsible persons who intentionally fail to pay trust fund taxes to the IRS can also face criminal penalties. This is true whether the company uses the funds to pay other creditors or a responsible person embezzles tax funds held in trust for personal use.

Tax fraud is a felony offense under federal law. Companies convicted of tax fraud can face substantial fines, and individuals convicted of tax fraud can face both fines and prison time. As a result, when facing an IRS audit pertaining to alleged underpayment of trust fund taxes, it is imperative to engage experienced defense counsel promptly.

Request a Confidential Consultation with Boston Tax Lawyer Kevin E. Thorn

If you are facing an IRS audit and need to know more about the Trust Fund Recovery Penalty or the risks of facing criminal prosecution for intentionally failing to pay employees’ trust fund taxes to the IRS, we encourage you to contact us right away. Call 617-692-2989, email ket@thornlawgroup.com or contact us confidentially online to schedule an appointment with Boston tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group today.