We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Trust Fund Recovery Penalty?

Mary McMahon
By
Updated: May 17, 2024
Views: 4,514
Share

A trust fund recovery penalty (TFRP) is a penalty that the Internal Revenue Service (IRS) in the United States can use to collect funds that should have been held in a trust fund and made over to the government. Employers are required to withhold certain amounts from employee paychecks and deposit these amounts in trust for the IRS, making periodic tax payments to the government from the trust. If a business fails to withhold or withholds but does not turn the money over, the IRS can use a trust fund recovery penalty to recover the monies.

The IRS is extremely aggressive about recovering funds that employers are supposed to held in trust. In the eyes on the United States government, these funds belong to the government, and if businesses fail to make their tax payments in a timely manner, the government will put resources to work to collect the money. In addition, failure to submit funds in trust hurts employees, because Social Security and other benefits monies are part of the trust fund. If a business doesn't pay an employee's Social Security, that employee will not have paid into the Social Security fund, and this can have an impact on benefits eligibility.

When the IRS determines that a business is either not collecting funds from paychecks or is not paying the IRS, it will alert the business. The business is usually given time to get current on payments or work out a payment plan. If it does not respond or has become defunct and cannot respond, the IRS can levy a trust fund recovery penalty.

The IRS looks at a business to identify any responsible parties, including accountants, people who process paychecks, and so forth. Any one of these parties can be subjected to a trust fund recovery penalty in the amount of the funds owed. Personal assets can be seized and sold and the responsible person will be pursued if it is not possible to pay the amount in full.

The definition of a “responsible party” can be broad. If the IRS issues a trust fund recovery penalty, people can try to argue that they are not responsible, but a better defense is often that the funds are not collectible. Employees should be aware of the implications of activities like signing checks or otherwise participating in payroll, as these activities can put them at risk of being viewed as responsible parties in the event that the business falls behind on its payroll taxes.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGeek researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Editors' Picks

Discussion Comments
By anon119627 — On Oct 18, 2010

If you have a work out payment plan in place and you are current can the IRS still go after and levy the bank accounts individuals they think are responsible?

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

Learn more
Share
https://www.wisegeek.net/what-is-a-trust-fund-recovery-penalty.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.