Everything You Need to Know About Trust Fund Recovery

Everything You Need to Know About Trust Fund Recovery

A trust fund recovery is a type of penalty on someone who evades or attempts to evade paying trust fund taxes to the government. These cases are pretty common in tax resolution, and the person who has to pay the penalty must work with a recovery professional to get out of the situation.

Trust fund taxes

Trust fund taxes comprise of a person's Social Security taxes and Medicare and withheld income tax. The IRS calls it trust fund tax because the employer keeps the employee's money in trust until he pays the taxes to the federal government. There are four types of trust fund taxes that come under the recovery process:

• Federal Insurance Contribution Act taxes

• Withheld income taxes

• Railroad retirement taxes

• Collected excise taxes, including taxes on indoor tanning services, a few selected communication services, FIRPTA taxes, and some transportation by air services.

Why is the government strict about trust fund recovery?

The government considers the penalty a punishment for those who delay or want to evade paying trust fund taxes. In fact, the IRS is quite aggressive about collecting the TFR penalty because it considers it a pecuniary penalty. The IRS wants to show that unpaid trust fund taxes lead to a huge monetary loss for the government. If the government doesn't receive trust fund taxes on time, it can't fund two of the most crucial federal programs: Social Security and Medicare.

More than considering trust fund recovery as a pecuniary penalty, the IRS believes that it's like stealing from your employees because they would benefit from the above-mentioned federal programs. The employer takes out trust fund taxes from his employees' paychecks by saying that he would deposit the same to the government. If he doesn't pay the tax on time, it means he has reasonable intention to steal that money. And that's why fund recovery is so crucial.

Defending a trust fund recovery case

A recovery lawyer tries to prove that his client didn't evade taxes intentionally. He tries to put the blame on someone else. Here are some of the steps that he takes to successfully defend this type of case:

• Gather pertinent information about his client's duties

• Obtain affidavits from other employees that specify the client's duties

• Check the statute of limitations

• Negotiate a settlement with the revenue officer

• Review the decision

• Consider the possibility of fund recovery by the IRS

Make sure you consult with a tax professional if you get a notice for a TFR penalty. He can suggest ways to get out of this complicated situation.