Failure to Remit Employees’ Income and FICA Taxes Can Lead to Substantial Penalties for Employers and Their Personnel

Offshore Account Update

Posted on March 18, 2022 |

Income tax season can present a variety of risks for businesses. One of these is the risk of facing a Trust Fund Recovery Penalty (TFRP) audit. If the information employees submit on their 1040s does not match what employers have reported and paid to the Internal Revenue Service (IRS) with regard to withheld income and FICA taxes, this can trigger an audit carrying the potential for significant penalties. New Jersey tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, explains.

The IRS Audits Employers for Income and FICA Tax Withholding Compliance

The IRS routinely audits employers for income and FICA tax withholding compliance. When employers fail to remit employees’ tax funds held in trust, not only does this harm the U.S. government, but it puts employees at risk for facing IRS scrutiny as well. Employees rely on their employers to pay a portion of their taxes each year; and, while employers have an obligation to remit trust fund taxes, the IRS ultimately holds employees responsible for the full amount they owe.

To avoid going after employees who have already had their taxes withheld, the IRS goes after employers it suspects of failing to remit withheld amounts. If an audit reveals that an employer has failed to remit employees’ income and FICA taxes, the IRS can impose the Trust Fund Recovery Penalty (TFRP).

Employer Tax Audits Can Lead to the Trust Fund Recovery Penalty

The Trust Fund Recovery Penalty is equal to the amount of income and FICA taxes withheld but not remitted. So, by failing to timely remit employees’ withholdings, employers can effectively double the amount they owe.

Crucially, however, in addition to imposing the TFRP on employers, the IRS can also impose the penalty on “responsible persons.” Responsible persons are those who “willfully” facilitate an employer’s underpayment (or nonpayment) of trust fund taxes—and may include (among others):

  • Officers and employees
  • Partners and shareholders
  • Directors and board members
  • Other persons “with authority and control over funds to direct their disbursement”
  • Personnel of third-party payroll service providers and professional employer organizations

Employer Tax Audits Can Also Lead to Criminal Charges

If the IRS suspects that an employer or individual has intentionally failed to pay trust fund taxes, it can also pursue charges for criminal tax fraud. These charges carry substantial fines and up to five years of imprisonment (in most cases). As a result, employers that are facing trust fund tax audits need to take these audits very seriously, and any individuals who may be implicated in any alleged underpayments should engage defense counsel as well.

Need Help? Contact New Jersey Tax Lawyer Kevin E. Thorn

If you have concerns about the potential consequences of a Trust Fund Recovery Penalty audit, we encourage you to contact us for more information. Please call 201-355-8202, email or contact us online to arrange a confidential consultation with New Jersey tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group.

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