Trust Fund Penalty

Congress enacted the Trust Fund Recovery Penalty Statute to encourage prompt payment of withheld and other collected taxes by allowing the Internal Revenue Service to assert a liability against responsible third parties. The amount of the penalty imposed by the statute for failure to comply with its provisions is measured by the tax to be collected or collected and not paid over. The penalty is civil in nature, not criminal.

The Trust Fund Penalty only applies to collected or withheld taxes that are imposed on persons other than the party who collects, accounts for, and pays over such taxes. The statute does not apply to direct taxes such as the employer’s portion of FICA, FUTA, nor uncollected income taxes. Once the Trust Fund Penalty has been imposed, the Internal Revenue Service has the same rights to collect the penalty as it would any other tax from the Taxpayer. The Internal Revenue Service gains the right to file liens and to levy and seize assets from the Taxpayer.

There are two major tests to determine if someone is subject to the Trust Fund Penalty. They are primarily questions of fact and may be stated as follows:

1. Whether the party against whom the penalty is imposed had the duty to account for, collect, and pay over trust fund taxes; and
2. Whether he or she willfully failed to perform this duty.

Succinctly stated, liability attaches to those with power and responsibility within the corporate structure for seeing that the withheld taxes are remitted to the Internal Revenue Service. To be subjected to the Trust Fund Penalty, a person required to collect withheld taxes must have failed to do so in a manner that was “willful.” The courts have given the term “willfulness” a very liberal interpretation. The definitions include deliberate choice, voluntarily, consciously, and intentionally. No fraudulent intent is necessary.

In the event of litigation, the Taxpayer can litigate his or her Trust Fund liability matter in either the U.S. District Court or the U.S. Court of Federal Claims. The U.S. Tax Court has no jurisdiction to hear trust fund liability cases. If a potentially responsible person also happens to be in bankruptcy, either before or after assessment, he or she can litigate the trust fund liability issues as a separate proceeding within the bankruptcy case and have a judicial determination just as he or she would have in District Court or Claims Court.