The Trust Fund Penalty is charged against an owner or other responsible party in a company who does not pay the company’s payroll taxes to the IRS.  It consists of the portion of payroll taxes withheld from the employee’s paycheck.  An employer that uses a payroll service provider (PSP) or Professional Employer

 

 

Organization (PEO), also called an employee leasing company, forwards the entire payroll amount to the PSP or PEO and the PSP or PEO then cuts checks to the employees and pays the state and federal payroll taxes.  This is to insure that the employer does not get behind in paying its taxes.  However, sometimes the PSP or PEO gets in trouble and does not properly pay its client’s taxes.  There is no question that the payroll service is responsible for the TFP in that case.  The TFP can also be charged against responsible parties inside the PSP or PEO.  In addition, the IRS takes the position that the employer and its owners are ultimately responsible because they should have overseen the payment by the payroll service and thus can also be charged with the TFP.  There are exceptions to this, such as when the PSP sends out false reports to the employer stating all taxes have been paid.  However, the employer must act quickly when he first receives a notice from the IRS stating that taxes are due.