Trust Fund Recovery Penalty for Failure to Pay Withholding Taxes

1)    Background.  In general, an employer and employee are each required to pay a portion of payroll taxes.  The employee’s share is withheld from the employee’s paycheck.  The employer should then account for the employee’s share and pay it to the IRS.  When cash flow in a business becomes an issue, however, the agents of the business may make the mistake of using the employee’s share to pay other bills.  In that situation, the IRS may impose a Trust Fund Recovery Penalty (the “TFRP”) on responsible persons in the business.


2)    What is the TFRP?  It is a penalty for failure to pay withholding taxes, which include income, social security and Medicare taxes, railroad retirement taxes, and collected excise taxes (“Trust Fund Tax”).  The penalty is imposed by holding the responsible person personally liable for the Trust Fund Tax.


3)    How Much Is the TFRP?

The TFRP is equal to:

    • The unpaid income taxes withheld and the employee’s portion of the withheld FICA taxes;


    • For collected taxes, the unpaid amount of collected excise taxes.

The TFRP includes only the taxes that the employee pays, but that the employer is required to remit to the IRS.  It does not include the portion of taxes for which the employer is responsible.


4)    Why Is It Called the TFRP?  It is called the TFRP because the payer of withholding Trust Fund Tax holds the money in trust until the taxes are deposited with the IRS.


5)    Who Can Be Assessed the TFRP?  Any person who:

    • is responsible for collecting or paying Trust Fund Tax; and
    • willfullly fails to collect them,
may be assessed the TFRP.


6)    Who is a Responsible Person for Purposes of the TFRP (a “Responsible Person”)?  A Responsible Person is a person or group of people who has the duty to perform, and the power to direct, the collecting, accounting, and payment of Trust Fund Tax.  These people include, but are not limited to:

    • An officer or employee of a corporation;
    • A member of employee of a partnership;
    • A corporate director or shareholder;
    • A member of a board of trustees of a nonprofit corporation; and
    • Another person with authority and control over funds to direct their disbursement.

7)    When Did a Responsible Person Act “Willfully”?  A Responsible Person acted willfully if she:

    • Must have been, or should have been, aware of the outstanding Trust Fund Tax; and
    • Either:

i.     intentionally disregarded the law; or

ii.     was plainly indifferent to its requirement.

A person may act willfully even if she had no evil intent or bad motive.  Note, however that some courts have held that reasonable cause is a defense to willfulness.


See also Internal Revenue Code § 6672; Treasury Regulation § 301.6672-1; 8.25.1 of the IRS Internal Revenue Manual; and this IRS article on the TFRP.


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