A company withholds income tax and the employee share of social security and Medicare tax from wages but fails to pay those amounts over to the government. The IRS seeks to collect the unpaid trust fund taxes personally from individuals connected to the business. Which person and amount does the trust fund recovery penalty reach?
- AOnly the company's outside payroll service provider, for the full amount of all unpaid employment taxes including the employer's own share.
- BAny responsible person who wilfully failed to collect or pay over the tax, for 100 percent of the withheld income tax and the employee share of social security and Medicare tax. Correct
- CAny shareholder who owns stock in the company, for 50 percent of the unpaid trust fund taxes regardless of involvement in payroll decisions.
- DThe company itself only, for the employer share of social security and Medicare tax that it failed to deposit during the period.
Why A is wrong: A payroll provider that merely processes payments is generally not a responsible person, and the penalty reaches only the trust fund portion, so this answer both targets the wrong party and the wrong amount.
Why B is correct: Under the trust fund recovery penalty a person with the duty and authority to pay the taxes who wilfully fails to do so is personally liable for 100 percent of the trust fund amount, which is the withheld income tax and the employee share of FICA.
Why C is wrong: Mere stock ownership does not create liability, and the penalty is not capped at 50 percent; the trap is assuming ownership equals responsibility, but the test is control over paying the taxes.
Why D is wrong: The penalty is designed to reach individuals personally, and it applies to the trust fund taxes withheld from employees, not the employer's own matching share, so this both misidentifies the target and the tax.