Trust Fund Recovery Penalty

[Unregistered]

Disclaimer: Client came to our office seeking assitance after the fact!

Husband and wife are sole shareholders of S-Corp. Wife did all bookkeeping, payroll, etc. She withheld payroll taxes, never sent them in. IRS has hit S-Corp with penalties and interest. Now we have been summoned to the revenue officers office for a meeting to determine the husband and wife's liability under TFRP. If, as I assume they will be, the husband and wife are found responsible, will the penalties and interest, along with the outstanding liability, now against the corporation be dropped or will the TFRP be in addition to the current balance owed?

This is not going to be a fun meeting!

Thanks in advance.

[outwest]

Strategy to avoid issue...

Arrive at the office with a check for the amount of the trust fund withholdings, then the issue goes away.

Just to review, the trust fund amounts are the fed income tax withholdings, FICA and Medicare but NOT the employer match. A payment very specificly for the Trust fund taxes leaves only the employer match, penalties and interest to deal with, none of which have the personal liability of the trust funds.

My condolances...

Doug

[Bees Knees]

TTB, page 23-7, "The penalty is the full amount of the unpaid trust fund tax. It is not in addition to the tax that should have been paid to the government. It is called a penalty, because it is imposed on an individual because the IRS cannot collect the unpaid tax from the employer or business that is liable for the tax."

In your S corp example, the S corporation is the employer. But the S corporation does not have the ability to pay all the back payroll taxes. So the IRS goes after the individual shareholders of the S corporation. The individual shareholders do not owe the tax. So in order to make the individual shareholders pay the tax, they have to be assessed a penalty equal to the tax that is due. The penalty that the individual shareholders pay replaces the tax the S corporation cannot pay.