© by Robert G. Nath, Esq.

1. What is the “trust fund recovery penalty?”
   
   It’s not a true penalty but only a substitute for part of the payroll taxes that an employer fails to pay. The employer is required to withhold income tax and FICA/Medicare from employee’s wages, and then pay these over by Federal Tax Deposit. Where the employer fails to pay these over, the law imposes personal liability on anyone “responsible” for the employer’s failure to pay over the withheld taxes. By this means the IRS hopes to “recover” the “trust fund” taxes not paid over. This personal liability is not avoided by state law protections of limited liability normally available for corporate debts.
   

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2. How does the IRS investigate this penalty?
   
   The agent assigned to collect the corporation’s payroll taxes will also investigate the “responsible persons” at the same time. If the corporation pays in full, no one is investigated for the trust fund. But short of that, the investigation will go forward. The agent will gather information on who had financial authority inside the company, and who knew about the taxes. Then the agent will make a formal written proposal of liability against one or more “responsible persons.”
   

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3. If someone else pays the trust fund penalty, do I get credit too?
   
   Yes, dollar for dollar. The corporation also gets credit (since it’s a corporate liability to start with). However, the IRS will apply those trust fund dollars first to the trust fund portion of the company’s taxes, leaving the employer’s portion of FICA/Medicare potentially still unpaid. If the corporation also pays to the IRS, you can get credit for those payments against your personal assessment if the corporation “designates” the payments to trust fund or if it pays more than the employer’s portion only.

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Robert G. Nath has focused on IRS matters for over 30 years. He holds degrees from Yale, the University of Pennsylvania, and Georgetown University. After clerking for a federal judge, Mr. Nath litigated tax cases for 8 years with the Tax Division, U.S. Department of Justice. Since 1984, he has been in private practice, representing individuals, entities, accountants and attorneys before the IRS and in court in tax collection, audit and tax litigation matters. Mr. Nath's book, "The Unofficial Guide to Dealing with the IRS" (Macmillan), was first published in 1997. He has been quoted in national media on tax procedure matters and has also appeared on radio and television programs. He has been an editor of professional journals and his articles have appeared in law reviews and other legal periodicals. Mr. Nath is a former U.S. Army Reserve Green Beret officer.
Note: Mr. Nath’s cases normally involved total tax liabilities of $100,000 or more.
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