Unfortunately many employers fall into this very dangerous trap during financially stressful times. Be forewarned though that any other means of meeting financial obligations is preferable to using payroll taxes.
Any individual within a company who distributes payroll checks to anyone considered an employee is automatically considered a trustee for the U.S. government. A percentage of the payroll taxes that are withheld are called “trust fund taxes” and belong to the government.
If payroll taxes are misused to pay other expenses instead of making payment to the IRS, they will assess what is called a trust fund civil penalty also known as a trust fund recovery penalty (TFRP). This civil penalty is imposed on the personal assets of any and all persons in the business having the responsibility for collecting, accounting for or paying over the taxes but “willfully” fails to do so. These individuals are considered by the IRS to be a “responsible person”. Be aware that the IRS can assess this civil penalty against every responsible person even if the business has gone belly up.
Once the IRS imposes a Trust Fund Recovery Penalty against a business’s responsible persons, it is the taxpayers’ responsibility to prove that they are either not a responsible person or that there was no payment to creditors when the payroll taxes were delinquent. Any responsible person in the business can avoid being assessed the TFRP by making all efforts to make sure that the withheld taxes are paid. If you are determined to be a responsible person the IRS can impose that you repay as much as 50% to 60% of the total payroll tax. The TFRP may be appealed by asking for a collection due process hearing or submitting an offer in compromise, among other actions.
The Trust Fund Civil Penalty is serious and could mean personal ruin. Seek the services of an experienced tax resolution specialist immediately.