Trust Fund Recovery Penalty
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The Trust Fund Recovery Penalty (TFRP) is one of the most serious tax penalties because it pierces the corporate veil—holding individuals personally liable for unpaid business payroll taxes. Unlike most business taxes that remain the entity’s responsibility, the TFRP can follow you personally for years.
What is the Trust Fund Recovery Penalty?
The Trust Fund Recovery Penalty, authorized under Internal Revenue Code Section 6672, applies when payroll taxes withheld from employee wages are not paid to the government. These ‘trust fund taxes’ include federal income tax withholding, Social Security (FICA), and Medicare taxes—funds employers hold in trust for employees until remitting them to the IRS.
Who Can Be Held Liable?
The IRS can assess the TFRP against any ‘responsible person’ within the business, including business owners, officers or executives, bookkeepers, and anyone with authority to sign checks or make financial decisions. Even bankers have been held liable in some situations. If you have decision-making authority over payroll taxes, you could be personally liable regardless of your title.
The Two-Part Test: Responsibility and Willfulness
To assess the TFRP, the IRS must establish both responsibility and willfulness. Responsibility means having authority to pay bills or taxes, sign checks, hire and fire employees, or make financial decisions. The test is broad and highly fact-dependent.
Willfulness means you knew or should have known the taxes were due and intentionally disregarded the obligation or were plainly indifferent to it. Willfulness can be established by showing you paid other creditors while payroll taxes remained unpaid.
Defending Against TFRP Assessments
Effective TFRP defense focuses on challenging either responsibility or willfulness. You may show you didn’t have actual authority over tax payments, were unaware of the obligations, or took reasonable steps to ensure compliance. If you receive notice proposing a TFRP assessment, you have the right to appeal before the penalty is assessed—an important opportunity to present your case.
If you are facing a Trust Fund Recovery Penalty assessment, contact Boss Tax Law immediately to discuss your defense options.