Trust Fund Recovery Penalty-Who Is On the Hook?


If your business is a sole proprietorship or a partnership, you and other responsible people will be held liable for the entire unpaid balance of the payroll tax debt, even if the business is closed.

Are The Business Owners Protected From Liability?

What if your corporation falls behind on payroll taxes?  Does the corporate status protect you from liability?  In short the answer is NO.

Congress enacted the Trust Fund Recovery Penalty Statute to prevent failure to pay withheld payroll taxes by a corporation.

IRC 6672 allows the IRS to assess a liability against “responsible people”. The amount of the penalty equals the amount of the payroll taxes required to be collected or collected and not paid over. The penalty is civil, not criminal.

Congress clearly restricted the provisions of IRC 6672 to “Trust Fund” taxes. The penalty only applies to collected or withheld payroll taxes that are imposed on persons other than the party who collects payroll taxes, accounts for payroll taxes, and pays over such payroll taxes.  In other words, the money that were collected from employees and not deposited with the Government, can be assessed personally against the “responsible person” who willfully failed in that duty.  There can be several responsible persons in an organization, but there must be at least one.  Just because you own the company, does not mean that you are automatically responsible.

Requirements For Liability

Two major tests determine the personal liability for trust fund recovery.  These are based on facts and circumstances of each investigation:

  1. 1.Did the person have a responsibility to collect and deposit trust fund taxes?
  2. 2.Did that person willfully fail to perform such duties

Generally, the IRS can go after any person who meets the tests. The person does not even need to be an officer or employee of the delinquent company.

It is common for the IRS to propose trust fund recovery penalty against several responsible persons. Once the debt is assessed, the IRS can collect against any one of the responsible persons.  The liability is joint and several, with each person owing the entire balance.  Any payments collected are credited to the entire debt.  If 2 persons are assessed for $200K in trust fund taxes, the each owe $200K not $100K each.  If the IRS levies one of their accounts and grabs $200K then debt of both is considered paid.  It is not uncommon for the person with a stronger financial condition to shoulder the bulk of the trust fund recovery, even if several people were assessed.

Responsibility for Trust Fund Taxes

Control of finances within the employer corporation is the key to meeting the “responsibility test. Did the person being investigated have the power to control the decision-making process?  Did they have control over the company’s allocation of funds to other creditors in preference over the IRS?

Willful Failure to Pay Trust Fund Taxes

The willfulness element does not require the responsible person have a nefarious purpose in not paying the payroll taxes. That person must merely be shown to have knowingly and intentionally disregarded the duty to pay trust fund payroll taxes to the IRS. “Willfulness” can be defined as voluntary, conscious, and intentional. A responsible person acted willfully if he ‘knowingly’ used available funds to prefer other creditors to the IRS.

TaxHelpers Can Help With Trust Fund Recovery

It is not uncommon for the IRS to assume certain facts without digging much deeper and erroneously attribute responsible person status to the wrong party.  Some time they assess the first person they can find.  Many times, the assessed person does not even know the personal assessment is in process.  If you are being targeted as a responsible person for trust fund recovery penalty please call our office to discuss your rights and options.

Related Topic: Strategy Guide for Back Payroll Taxes

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