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Payroll Taxes and the Trust Fund Penalty (TFP)
Posted by: Mark Zinn
December 21, 2007
Topic: Payroll Taxes and the Trust Fund Penalty (TFP)

A company's liability for payroll taxes is twofold: first, the company is responsible for withholding one-half (7.65%) of the total liability (15.3%); secondly, the company is also responsible for matching that withholding with the other half.

The part withheld is called the trust fund portion because it is the employee's money, and should be held in trust. Unfortunately, when bills need to be paid, and cash is not abundant, many companies "borrow" from the money withheld from their employees, planning to pay it back when business picks up.

Often, however, business does not pick up, and the problem continues to grow until it is completely un-curable. The IRS does not hesitate to shut companies down for this type of issue. And, if the company is shut down, whether voluntarily by the owner, or involuntarily by the IRS, someone from the former company is going to be held liable for the part of the payroll tax that was withheld from the employee's paychecks. This liability is called the Trust Fund Penalty and attaches personally to anyone who had responsibility to pay the withheld money over to the IRS.

In many small companies, the owner will be that person. However, the IRS will also attempt to hold liable anyone who had the ability to sign checks. So, if the company has a Treasurer, who's responsibility it is to pay bills, that person could be held "jointly and severally liable" for the TFP. Further, if a Vice President, for example, signed one check while the person with that responsibility was out of town, the IRS will certainly attempt to hold that person liable.

Joint and severable liability means that all responsible parties are jointly liable, and each party is individually liable. And, again, the TFP is something that does not go away when the company does.

On the other hand, the portion that the company was supposed to match is a liability that is extinguished when the company is closed. Therefore, doing so voluntarily is sometimes a viable option.

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Substitute for Return (SFR)
Posted by: Mark Zinn
December 20, 2007
Topic: Substitute for Return (SFR)

"Substitute for Return" is the term the IRS uses for the return they file for you, if you do not file one for any given year. The most important thing to note is, it is never beneficial to have the IRS file a return for you.

First, the IRS will not spend time reviewing what deductions you should receive. They will simply give you a standard deduction, whether or not you have excess deductions which would warrant filing a Schedule A. Therefore, if you own a home, and pay interest that exceeds your standard deduction (which is almost always the case), you will not receive that benefit if the IRS files your return for you. As a result, your taxable income, and resulting tax liability, will be higher than it should be.

Secondly, the IRS will classify you as, "married filing separately", which is the least favorable category, since the standard deduction is lower.

The bottom line is, even if you know that you won't be able to pay any amount due, you still need to file your own return, so that you will have an accurate assessment of what is due. And, if you don't believe you will owe any tax, you need to file a return to show the IRS that you don't. If they have to file one for you, the SFR will likely show that you do have a tax liability.

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