A trust fund is money an employer withholds from employee salaries to pay income tax, social security, and Medicare taxes to the Federal Treasury; these are referred to as trust fund taxes. Failure to pay these taxes can create financial liabilities and legal issues, but there are several steps that can be taken that will help if you are hit with a trust fund recovery penalty.
Maintain the Trust
To avoid problems with trust fund tax, keep accurate records and monitor the process to guard against internal fraud. Employers are responsible for withholding income tax and employees' share of FICA (social security and Medicare) and then paying on their behalf. It is called a "trust" fund tax because the employees trust employers to make this payment. First, ensure that you are keeping accurate financial records. Use an accounting software package like Microsoft Quickbooks, which automatically calculates and withholds the correct amounts. Also, make sure you have a trustworthy bookkeeper or accountant. Trust fund money can be hidden for certain periods of time (before the taxes are due), and are vulnerable to embezzlement. If you are a business owner, keep an eye on these accounts and make sure the money is there when it comes time to file payroll returns.
Getting Help
There are two options to pursue if you fall behind on trust fund tax payments and need help. First, find out if you qualify for an "Offer of Compromise." With this arrangement, you may be able to strike an agreement with the IRS where you do not have to repay the full amount you are liable for. You may be eligible if there is doubt that the liability is correct or doubt that it will ever be possible for payment to made in full, or if there is an exceptional circumstance where payment would cause great hardship or be seen as inequitable. Also, look into paying the restitution in installments to avoid immediate seizure of assets--which can include your personal assets.
Warnings
Remember that the IRS can levy a trust fund recovery penalty against an individual--not just a business--deemed to have been willfully responsible for not paying taxes. Therefore, if you are being penalized be prepared to account for your personal finances. Also, contact a reputable financial adviser if you try pursue an Offer of Compromise, because some offers are not legitimate. The IRS has issued past consumer alerts warning of promoters' claims that tax debts can be settled for "pennies on the dollar," and many of these offers turn out to be too good to be true.
