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IRS's Small Business/Self-Employed (SB/SE) Division has issued an internal memorandum which provides that the trust fund recovery penalty may be imposed against third-party payroll service providers as well as the employer. IRC section 6672 imposes the TFRP on any person who: 1) is responsible for collecting, accounting for, and paying over payroll taxes; and, 2) willfully fails to perform the function. This is also known as the 100% penalty because it is equal to the amount of the tax that was no collected and paid.
This appears to represent a major policy change by the IRS, which in the past has generally looked to officers, board members, shareholders and key employees of the tax delinquent employer. Common law employers may designate a third party who is not the common law employer or a statutory employer to take over some or all of the employer's federal employment tax withholding, reporting, and payment responsibilities and obligations. The new guidance indicates that a third-party payer may be considered a responsible person, if the person had significant control over the payment of its client's employment taxes. A third-party payer is considered to have willfully failed to perform the payroll tax responsibility if the failure to perform the responsibility was intentional, deliberate, voluntary, reckless, or knowing, as opposed to accidental.
Use of a third-party payer does not relieve a common law employer from its responsibilities of ensuring that its tax obligations are met. A common law employer that uses a third party to prepare its employment taxes can still be subject to the TFRP, if it satisfies the responsible person and willfulness requirements. The employees can also be subject to the TFRP.