Trust Fund Recovery Penalty
The Trust Fund Recovery Penalty is used by the IRS when an agent (a person or entity in charge of acting on behalf of another) collecting taxes on behalf of the IRS does not collect those taxes or fails to remit the tax collected the IRS.
The most common example of this occurrence is for employers who are responsible for withholding income and payroll taxes from an employee paycheck, but do not remit the money withheld to the IRS, usually in the form of estimated tax deposits (and the filing of Form 941).
The purpose of the Trust Fund Recovery Penalty is to hold individuals liable for the portion of the taxes that an employer (usually a business) is obligated to withhold and remit to the IRS. Since we have due process in the United States, a fundamental right, the government or in this case the IRS, must adhere to a process and the law as to who and how this penalty is assessed. Like most things involving people, the facts and circumstances are at times very complicated, but other times very unclear.
The law requires the IRS to assess the Trust Fund Recovery Penalty against individuals who are both responsible for collecting or paying the tax and who willfully fail to collect or pay the tax. However, the willful criteria may be substituted for reckless disregard, meaning that turning a blind eye may not be a defense or at least a strong one.
Nevertheless, the IRS may end up pursing an individual who does not meet this criteria, but is not necessarily aware of the laws or his/her rights. The reason for this may be misinformation, mistake, or it could be because of a legal theory known as joint and several liability. Any and all individuals who meet the criteria for the Trust Fund Recovery Penalty of the employer entity that owes trust fund taxes (another term for taxes withheld or collected for the government, i.e. IRS) owes the liability jointly and severally.
This means that if the IRS only has to collect against one individual for the balance due, even if there are several who fit the criteria of responsible and willful.
This does not mean that an individual cannot seek a civil action against the other jointly responsible individuals, but the IRS will likely start with whoever has the deep pockets because the cost in efforts to go after multiple individuals instead of one is likely higher.
There are other circumstances where the penalty may be assessed against an individual, such as, the collection and remittance of excise taxes.
While excise taxes may be less common, there is vast array of excise taxes and whether the tax should have been collected and remitted tends to get complicated for those seeking certain ventures without the assistance or guidance of a tax professional.
An example is the collection of excise taxes on indoor tanning salon services, certain fuel purchases, heavy highway vehicle use tax, environmental taxes, certain imported products, communications tax, air transportation tax, manufacturer tax, retail tax on heavy trucks/trailers/tractors, ship passenger tax, and the list of exceptions may be even longer.
Keep in mind the IRS will likely ask to conduct an interview and will be polite and friendly, but that doesn’t mean they won’t assess the penalty against you.