It can be tempting to use payroll tax withholdings as a source of operating capital for your business, especially in troubled times. But this is dangerous – the IRS can penalize anyone in your business who took part in this decision with personal liabilty for the unpaid taxes.
This is known as the trust fund recovery penalty. The amount of the penalty is equal to the amount of money deducted from employees paychecks but not paid to the IRS.
But there are time limitations on the IRS pursuit of the trust fund recovery penalty. If the IRS does not assign a Revenue Officer to your case and investigate you in a timely manner, they lose the right to do so. Here’s an overview of when time is up on a trust fund recovery assessment:
Statute of Limitations Expiration Date – Trust Fund Recovery Penalty.
The IRS timeframe for assessment of the trust fund recovery penalty against you is based on the filing date of your company’s employment tax returns (Form 941).
The IRS has three years from the filing date of the employment tax returns to come to you with the trust fund penalty. The term “filing date” is important here – it is defined by Internal Revenue Code 6501(b)(2), which states that employment tax returns filed for any period ending within a calendar year are considered filed on April 15 of the succeeding year.
941 return timely filed for quarter ended June 30, 2007. The clock starts ticking on April 15, 2008, the date the return is deemed filed for trust fund assessment purposes. Final assessment of the trust fund recovery penalty must be made before April 15, 2011, three years later.
941 return timely filed for quarter ended December 31, 2007. The clock starts tickong on April 15, 2008, the date the return is deemed filed for trust fund assessment purposes. Final assessment of the trust fund recovery penalty must be made before April 15, 2011, three years later.
If an employment tax return (Form 941) is filed late, the statute of limitations on assessment of the trust fund penalty expires three years from the late filing date, provided it is later than the statute expiration date if the return had been filed on time.
Once or twice a year I see time pass for clients without the IRS pursuing trust fund assessments. It does happen, although the IRS is trying to close the gap.