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BR Tax Group - Accounting Firm

Are You at Risk for A Trust Fund Penalty?

Article Highlights:

  • Withholding Trust Funds 
  • Trust Fund Penalty 
  • Responsible Persons 
  • Misapplication of Trust Funds 
When an employer withholds Social Security and income taxes from an employee, those funds are the property of the government, and the employer must hold those funds in “trust” until the funds are turned over to the government. Failure to do so could lead to the so-called trust fund penalty, which is equal to 100% of the withholding from the employees’ wages. The penalty applies to any willful failure to collect, account for and pay over Social Security and income taxes required to be withheld from employee wages.

The Treasury Inspector General for Tax Administration has made recommendations to the IRS for timely assessing and collecting the responsible person penalty, and the IRS is adopting the recommendations. The government has always been very aggressive about collecting trust fund penalties and will pursue collecting the penalty from the “responsible person.” This is where you may be at risk.

The IRS broadly defines a “responsible person” to include corporate officers, directors, and shareholders under a duty to collect and pay the tax as well as a partnership's partners, or any employee of the business under such a duty.

So, if you are a person with the power to see that the taxes are paid, you may be responsible. Frequently more than one person is a responsible person, and each one is at risk for the entire penalty. Even though you may not be directly involved with the withholding process, if you discover that trust funds that are due to the government are instead being used to pay a business creditor, you become a “responsible person.” You always have to keep in mind that the trust fund money belongs to the government and bowing to business pressures to pay bills or obtain supplies instead of transmitting the withheld taxes to the government will be viewed as willful (bad) behavior for purposes of the penalty.



Unlike some other types of penalties, there are no acceptable excuse for failure to withhold the required payroll taxes or for borrowing withheld amounts to pay other expenses. Even if you have a payroll company collecting and paying over the withholding, and that firm should go belly up, or someone in that firm absconds with the trust finds, guess who is still responsible for paying the government? The responsible person at the business, of course!

Don’t fall victim to the penalty by allowing a partner or corporate superior to persuade you not to withhold or timely pay over the trust funds to the government. If you are interested in discussing your potential risks and exposure to this penalty, please give this office a call.




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“Bernard and his team at BR tax group are top notch. This is my first year using them after switching from a different local CPA and I didn't realize how much tax info I've been missing. His communication is great. The additional information he provides to maximize tax savings is something I didn't get from my previous CPA. Thanks Bernard”

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Frequently Asked Questions

You can prepare your taxes yourself, especially if your business is simple.

But once you have contractors, employees, business loans, equipment purchases, mileage, mixed expenses, or growing revenue, things get more complex. At that point, tax preparation becomes a way to make sure your business is reported correctly, your deductions are handled properly, and your records can support what you file.

Send anything that shows what your business earned, spent, bought, paid, borrowed, or changed during the year.

That usually means your income records, bank statements, credit card statements, payroll reports, contractor payments, loan documents, mileage records, and prior-year tax return. Also tell me about anything unusual, such as buying a vehicle, hiring someone, opening a new location, or taking out a business loan.

Messy books can slow things down. If expenses are in the wrong categories, transactions are missing, or personal and business spending are mixed together, your tax return may not show the right profit. We may need to clean things up before filing, so your return is accurate and easier to support.

Possibly, if it was truly for your business and you have proof.

Still, it is much better to avoid this when you can. A separate business bank account and business credit card make everything cleaner. They save time, reduce confusion, and make your records much easier to defend if anyone ever asks questions.

Most small business owners can deduct ordinary business expenses like software, advertising, supplies, insurance, rent, payroll, contractor payments, professional fees, travel, and some vehicle costs.

The question I usually ask is simple. Was this expense clearly for the business? If yes, we can look at how it should be handled. Personal expenses should stay personal.

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