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Tax & Accounting

Could You Be Hit With The Trust Fund Recovery Penalty? & Taking Casualty Loss Tax Deductions Is Now Harder

By April 21, 2022July 3rd, 2023No Comments

Could You Be Hit With The Trust Fund Recovery Penalty?

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

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 can be penalized 100% of the taxes due. Accordingly, the amounts the IRS seeks when the penalty is applied are usually substantial, and the IRS is aggressive in enforcing the penalty.

A wide-reaching penalty

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

Here are some questions and answers to help you avoid incurring the penalty:

What actions are penalized? The Trust Fund Recovery Penalty applies to willful failures to collect or truthfully account for and pay over Social Security and income taxes required to be withheld from employees’ wages.

Who is at risk? The penalty can be imposed on anyone “responsible” for collection and payment of the tax. This has been broadly defined to include corporate officers, directors and shareholders who are under a duty to collect and pay the tax, and a partnership’s partners or any employee of the business with such a duty. Even voluntary board members of tax-exempt organizations, who are generally exempt from responsibility, may be subject to this penalty under certain circumstances. In some cases, responsibility has even been extended to family members close to the business, and to attorneys and accountants.

According to the IRS, responsibility is a matter of status, duty and authority. Anyone with the power to see that the taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay over withheld taxes and you have the power to pay them but instead you make payments to creditors and others, you become a responsible person.

Although a taxpayer held liable can sue other responsible people for contribution, this action must be taken after the penalty is paid. It isn’t part of the IRS collection process.

What is considered “willful?” For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bending to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes that are due to the federal government is willful behavior. The IRS specifically defines “willfully” in this instance as “voluntarily, consciously and intentionally” paying other expenses instead of the withholding taxes.

Just because you delegate these responsibilities to someone else doesn’t necessarily mean you’re off the hook. Your failure to deal with the task yourself can be treated as the willful element.

Never borrow from taxes

Under no circumstances should you ever fail to withhold taxes or “borrow” from withheld amounts. All funds that have been withheld from employee paychecks should be paid over to the government in full and on time. Contact us with any questions about making tax payments.

Taking Casualty Loss Tax Deductions Is Now Harder

Unexpected disasters can happen anywhere, causing damage to your home and personal property. Before the Tax Cuts and Jobs Act (TCJA), eligible casualty loss victims could claim a deduction on their tax returns. But restrictions make it tougher to qualify for these deductions.

What’s considered a casualty for tax purposes? It’s a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, fire, act of vandalism or terrorist attack.

Higher hurdles to qualify

The TCJA generally eliminates deductions for personal casualty losses through 2025, unless the losses are due to a federally declared disaster.

There is an exception to the general rule, however: If you receive insurance proceeds that result in a personal casualty gain, you can deduct personal casualty losses up to the amount of the gain, even without a federal disaster declaration.

Special election

If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year and claim a refund. If you’ve already filed your tax return for that year, you may file an amended return and elect to claim the deduction for the earlier year. This may help you get extra cash when you need it.

The election must be made no later than six months after the due date (without extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.

Calculating the deduction

These three steps must be taken to calculate the casualty loss deduction for personal-use property in an area declared a federal disaster:

1. Subtract any insurance proceeds,

2. Subtract $100 per casualty event, and

3. Combine the results from steps 1 and 2, then subtract 10% of your adjusted gross income for the year you claim the loss deduction.

Be aware that another factor that complicates your ability to claim a casualty loss is that you must itemize deductions to do so. The TCJA significantly raised the standard deduction through 2025. For 2022, it is $12,950 for single filers, $19,400 for heads of household and $25,900 for married couples filing jointly. A higher standard deduction means fewer individuals will itemize deductions. So, even if you qualify for a casualty loss deduction, you might not see a tax benefit if you don’t have enough itemized deductions.

Contact us

The rules described here are for personal property. Keep in mind, the rules for business or income-producing property are different. It’s easier to secure a business property casualty loss deduction. If you’re a victim of a disaster (business or personal), we can help you navigate the complex rules.