Trust Fund Recovery Penalties are actions taken against the owners, officers, directors, shareholders or other persons with an interest in a corporation with unpaid employment tax liabilities in California. By enacting a California Trust Fund Recovery Penalty, the I.R.S. makes the individuals who run the business personally responsible for the unpaid taxes; if the situation escalates far enough, the I.R.S. can collect from their personal assets.
The I.R.S. can institute levies on bank accounts, wages and seize physical assets such as vehicles, boats and real estate. Despite their power within the company, the higher-ups have little protection against the I.R.S. once they’ve enacted a Trust Recovery Penalty against them.
Before taking that step, however, the I.R.S. reviews the situation thoroughly. They investigate everything from check signing authority, the individual’s role and responsibility within the company, the percentage of their ownership or stake in the company, the amount of influence they have in decision-making, the person who signed the tax, and who holds the the authority in hiring and firing. In this way, should they choose to enact a California Trust Fund Recovery Penalty, they know they are doing so against someone who is actually responsible for the taxes going unpaid. If a shareholder is uninvolved with the operation of the corporation, for example, a Trust Fund Recovery penalty may not apply to them.
The Trust Fund Recovery Penalty includes all income tax taken from employees’ wages, plus their share of Medicare and FICA. Usually, about half of the total liability is part of the Trust Fund Recovery Penalty, interest and other penalties not included.
The I.R.S. doesn’t casually slap corporations with Trust Fund Recovery Penalties. It is usually the end result of an intensive investigation. They must complete certain forms and conduct an interview with the individuals under question, after which they draw up a Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes. Should the I.R.S. choose to pursue instituting the Trust Fund Recovery Penalty against that party, they complete Form 2751, a Proposed Assessment of Trust Fund Recovery Penalty. At this point, the person under investigation has 60 days to file a protest.
Owners, shareholders or higher-ups in a corporation that has failed to pay federal payroll taxes, or said parties whose personal or business reputations are at risk due to a Trust Fund Recovery Penalty in California have a challenge ahead of them, and one that should not be handled alone. It is strongly advised to enlist the help of an experienced tax professional who can both limit exposure to the public and thoroughly investigate the I.R.S.’s procedures in your case to ensure it was carried out correctly. Any mistakes on their part can invalidate the entire process. Further, they can monitor the sale of all company assets and make sure the profits are applied directly to your debt. No matter what, the legal support a tax professional can provide can mean the difference between the survival of your business, your finances and your reputation.