trust - Linkenheimer LLP CPAs & Advisors

A Refresher on the Trust Fund Recovery Penalty for Business Owners and Executives

One might assume the term “trust fund recovery penalty” has something to do with estate planning. It’s important for business owners and executives to know better.

In point of fact, the trust fund recovery penalty relates to payroll taxes. The IRS uses it to hold accountable “responsible persons” who willfully withhold income and payroll taxes from employees’ wages and fail to remit those taxes to the federal government.

A matter of trust

The trust fund recovery penalty applies to employees’ share of payroll taxes, including withheld federal income taxes and the employee share of Social Security and Medicare taxes.

These monies are considered trust funds because they’re the property of the federal government, held in trust by the employer. The penalty amount is 100% of the unpaid taxes plus interest — it essentially serves as an alternative tax-collection method.

A responsible person

The trust fund recovery penalty is particularly dangerous because it can ensnare persons who ordinarily are protected against personal liability for business debts. As stated in the tax code, the penalty provides that:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account […]

By Linkenheimer LLP|2023-10-13T20:41:06+00:00October 13th, 2023|payroll, trust|0 Comments

Who in a Small Business Can Be Hit with the “Trust Fund Recovery Penalty?”

There’s a harsh tax penalty that you could be at risk for paying personally if you own or manage a business with employees. It’s called the “Trust Fund Recovery Penalty” and it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.

Because taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is aggressive in enforcing the penalty.

Wide-ranging penalty

The Trust Fund Recovery Penalty is among the more dangerous tax penalties because it applies to a broad range of actions and to a wide range of people involved in a business.

Here are […]

By Linkenheimer LLP|2021-07-12T18:18:20+00:00July 12th, 2021|tax planning, trust|0 Comments

How to Ensure Life Insurance Isn’t Part of Your Taxable Estate

If you have a life insurance policy, you may want to ensure that the benefits your family will receive after your death won’t be included in your estate. That way, the benefits won’t be subject to federal estate tax.

Current exemption amounts

For 2021, the federal estate and gift tax exemption is $11.7 million ($23.4 million for married couples). That’s generous by historical standards but in 2026, the exemption is set to fall to about $6 million ($12 million for married couples) after inflation adjustments — unless Congress changes the law.

In or out of your estate

Under the estate tax rules, insurance on your life will be included in your taxable estate if:

Your estate is the beneficiary of the insurance proceeds, or
You possessed certain economic ownership rights (called “incidents of ownership”) in the policy at your death (or within three years of your death).

It’s easy to avoid the first situation by making sure your estate isn’t designated as the policy beneficiary.

The second rule is more complicated. Just having someone else possess legal title to the policy won’t prevent the proceeds from being included in your estate if you keep “incidents of ownership.” Rights […]

By Linkenheimer LLP|2021-04-01T16:52:44+00:00April 1st, 2021|estate, estate tax|0 Comments

Steer Clear Of The Trust Fund Recovery Penalty

If you own or manage a business with employees, you may be at risk for a severe tax penalty. It’s called the “Trust Fund Recovery Penalty” because it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.

Because the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is very aggressive in enforcing the penalty.

Far-reaching penalty

The Trust Fund Recovery Penalty is among the more dangerous tax penalties because it applies to a broad range of actions and to a wide range of people involved in a business.

Here […]

By Linkenheimer LLP|2020-09-03T20:02:20+00:00July 7th, 2020|business, income tax, irs, social security, tax planning|0 Comments

Age-Related Tax and Financial Milestones

In an era filled with uncertainty, you can count on one thing: time marches on! This article covers some important age-related tax and financial planning milestones that you should keep in mind for yourself and loved ones.

Ages 0–23

The so-called “Kiddie Tax” rules can potentially apply to your child’s (or grandchild’s) investment income until the year he or she reaches age 24. Specifically, a child’s investment income in excess of the applicable annual threshold is taxed at the parent’s marginal tax rate.

Note: For 2018 and 2019, the unfavorable income tax rates for trusts and estates were used to calculate the Kiddie Tax. Recent legislation changed this for 2020 by once again linking the child’s tax rate to the parent’s marginal tax rate. However, you may elect to apply this change to your 2018 and 2019 tax years. If we feel an election would be beneficial for 2018, we will recommend amending your return.

For 2020, the investment income threshold is $2,200. A child’s investment income below the threshold is usually taxed at benign rates (typically 0% for long-term capital gains and dividends and 0%, 10%, or 12% for ordinary investment income and short-term gains). Note […]

By Linkenheimer LLP|2020-09-03T20:03:17+00:00February 28th, 2020|estate, irs, New Tax Laws, tax implications|0 Comments