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Payroll Tax Problem

Trust fund tax is a portion of employee's wages (income tax, social security, and Medicare taxes - generally known as payroll tax) withheld by an employer and kept in trust until paid to the Treasury.

When paid, employees do not actually receive all the money they earned. The employer has the responsibility of withholding tax from their paychecks. The income tax and employees' share of FICA (social security and Medicare) withheld are part of their wages handed to the U. S. Treasury instead of to the employees. The employees trust the employer that he pays the withholding to the Treasury by making Federal Tax Deposits. That is why they are called trust fund taxes.

According to IRS records, nearly 2 million businesses owe about $49 billion in payroll taxes. The businesses that failed to remit withheld payroll taxes are typically in wage-based industries and had few available assets from which IRS could recover these taxes. They are usually small, closely held businesses using a corporate structure, but this varies throughout the country.

Congress enacted the Trust Fund Recovery Penalty Statute. The statute authorizes the IRS to assert a liability against responsible third parties thus encouraging prompt payment of withheld and other collected payroll taxes. Also, the statute imposes a penalty for failure to comply with its provisions. The amount of the penalty is measured by the payroll taxes required to be collected or collected and not paid.

The penalty only attaches to collected or withheld payroll taxes imposed on persons other than the party who collects payroll taxes, accounts for payroll taxes, and pays over such payroll taxes.