Individual Trust Fund Recovery Penalty Frequently asked questions.
The Internal Revenue Service (IRS) imposes a trust fund recovery penalty (TFRP) on certain individuals who are responsible for collecting, accounting for, or paying over certain taxes withheld from employees' wages.
1. What is the IRS trust fund recovery penalty?
The TFRP is a penalty that is imposed on individuals who are responsible for collecting, accounting for, or paying over certain taxes withheld from employees’ wages. The penalty is equal to the amount of the unpaid taxes and is separate from any penalty or interest that may be assessed for the unpaid taxes.
The TFRP applies to the following taxes:
– Federal income tax withheld from employees’ wages
– Social Security and Medicare taxes withheld from employees’ wages
– Railroad Retirement Tax Act taxes withheld from employees’ wages
The TFRP can be imposed on any person who is responsible for collecting, accounting for, or paying over the above-listed taxes and willfully fails to do so. This can include owners, officers, and employees of a business that is required to withhold and pay over taxes. It is important to note that the TFRP can be imposed on more than one person for the same unpaid taxes.
2. How does the IRS failure to pay penalty work?
The failure to pay penalty is calculated as a percentage of the tax owed that is not paid by the due date. The penalty is generally 0.5% of the unpaid tax for each month or part of a month that the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty is calculated from the due date of the return until the tax is paid in full.
If you file your return on time but do not pay the full amount owed, the failure to pay penalty will apply to the unpaid balance. If you do not file your return on time and do not pay the full amount owed, you may be subject to both the failure to file penalty and the failure to pay penalty.
3. What can you do if you are subject to the trust fund recovery penalty?
If you are subject to the TFRP, there are several things you can do to reduce or eliminate the penalty. One option is to pay the unpaid taxes as soon as possible to reduce the penalty and interest charges that accrue over time.
You may also be able to negotiate an installment agreement or an offer in compromise with the IRS to settle your tax debt. An installment agreement allows you to pay your taxes over time, while an offer in compromise allows you to settle your tax debt for less than the full amount owed.
It is also important to seek the advice of a qualified tax professional to help you navigate the TFRP and other tax issues.
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