Trust fund recovery penalty | Payroll taxes

The Trust Fund Recovery Penalty (“TFRP”), or sometimes referred to as a “Civil Penalty” or “100% Penalty,” is based on IRC § 6672. This provision of the law allows the IRS to personally assess responsible persons for unpaid payroll taxes.

What are “trust taxes”?

“Trust taxes” are those that are collected or withheld taxes that are imposed on person(s) other than the party who collects, accounts for, and pays over such taxes.

For example, IRC § 7501 provides that:

“Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States. The amount of such fund shall be assessed, collected, and paid in the same manner and subject to the same provisions and limitations (including penalties) as are applicable with respect to the taxes from which such fund arose.”

Why should I care about trust taxes

In short, personal liability. The Trust Fund Recovery Penalty, “TFRP,” “Civil Penalty,” 100% Penalty, or 6672 Penalty is the IRS’s ability to pierce the veil of limited liability of a corporation or LLC.

Under the law, a person can be personally liable for a portion of unpaid payroll taxes. Specifically, IRC § 6672 provides that:

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(a) General rule
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.

(b) Preliminary notice requirement
(1) In general
No penalty shall be imposed under subsection (a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212 (b) or in person that the taxpayer shall be subject to an assessment of such penalty.
(2) Timing of notice
The mailing of the notice described in paragraph (1) (or, in the case of such a notice delivered in person, such delivery) shall precede any notice and demand of any penalty under subsection (a) by at least 60 days.
(3) Statute of limitations
If a notice described in paragraph (1) with respect to any penalty is mailed or delivered in person before the expiration of the period provided by section 6501 for the assessment of such penalty (determined without regard to this paragraph), the period provided by such section for the assessment of such penalty shall not expire before the later of—
(A) the date 90 days after the date on which such notice was mailed or delivered in person, or
(B) if there is a timely protest of the proposed assessment, the date 30 days after the Secretary makes a final administrative determination with respect to such protest.
(4) Exception for jeopardy
This subsection shall not apply if the Secretary finds that the collection of the penalty is in jeopardy.

(c) Extension of period of collection where bond is filed
(1) In general
If, within 30 days after the day on which notice and demand of any penalty under subsection (a) is made against any person, such person—
(A) pays an amount which is not less than the minimum amount required to commence a proceeding in court with respect to his liability for such penalty,
(B) files a claim for refund of the amount so paid, and
(C) furnishes a bond which meets the requirements of paragraph (3),
no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until a final resolution of a proceeding begun as provided in paragraph (2). Notwithstanding the provisions of section 7421 (a), the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court. Nothing in this paragraph shall be construed to prohibit any counterclaim for the remainder of such penalty in a proceeding begun as provided in paragraph (2).
(2) Suit must be brought to determine liability for penalty
If, within 30 days after the day on which his claim for refund with respect to any penalty under subsection (a) is denied, the person described in paragraph (1) fails to begin a proceeding in the appropriate United States district court (or in the Court of Claims) [1] for the determination of his liability for such penalty, paragraph (1) shall cease to apply with respect to such penalty, effective on the day following the close of the 30-day period referred to in this paragraph.
(3) Bond
The bond referred to in paragraph (1) shall be in such form and with such sureties as the Secretary may by regulations prescribe and shall be in an amount equal to 11/2 times the amount of excess of the penalty assessed over the payment described in paragraph (1).
(4) Suspension of running of period of limitations on collection
The running of the period of limitations provided in section 6502 on the collection by levy or by a proceeding in court in respect of any penalty described in paragraph (1) shall be suspended for the period during which the Secretary is prohibited from collecting by levy or a proceeding in court.
(5) Jeopardy collection
If the Secretary makes a finding that the collection of the penalty is in jeopardy, nothing in this subsection shall prevent the immediate collection of such penalty.

(d) Right of contribution where more than 1 person liable for penalty
If more than 1 person is liable for the penalty under subsection (a) with respect to any tax, each person who paid such penalty shall be entitled to recover from other persons who are liable for such penalty an amount equal to the excess of the amount paid by such person over such person’s proportionate share of the penalty. Any claim for such a recovery may be made only in a proceeding which is separate from, and is not joined or consolidated with—
(1) an action for collection of such penalty brought by the United States, or
(2) a proceeding in which the United States files a counterclaim or third-party complaint for the collection of such penalty.

(e) Exception for voluntary board members of tax-exempt organizations
No penalty shall be imposed by subsection (a) on any unpaid, volunteer member of any board of trustees or directors of an organization exempt from tax under subtitle A if such member—
(1) is solely serving in an honorary capacity,
(2) does not participate in the day-to-day or financial operations of the organization, and
(3) does not have actual knowledge of the failure on which such penalty is imposed.
The preceding sentence shall not apply if it results in no person being liable for the penalty imposed by subsection (a).”

How much is the trust fund recovery penalty?

May taxpayers hear “penalty” and believe that the trust fund recovery penalty is an amount in addition to the unpaid payroll taxes. This is incorrect, as the trust fund recovery penalty is the personal assessment of a certain portion of the total unpaid payroll taxes, specifically the amount of the unpaid balance of the trust fund tax. The penalty is computed based on:

  • The unpaid income taxes withheld, plus
  • The employee’s portion of the withheld Federal Insurance Contributions Act (“FICA”) taxes (Social Security and Medicare).

The amount that can be personally assessed generally does not include late filing or late payment penalties, or even interest against the employer; however, interest will accrue on the personally assessed amounts.

Are there state alternatives?

Yes. California has comparable trust fund recovery penalties for both state payroll taxes and state sales taxes.

For the EDD and California payroll taxes, California Unemployment Insurance Code § 1735 provides that:

“Any officer, major stockholder, or other person, having charge of the affairs of a corporate, association, registered limited liability partnership or foreign limited liability partnership, or limited liability company employing unit, who willfully fails to pay contributions required by this division or withholdings required by Division 6 (commencing with Section 13000) on the date on which they become delinquent, shall be personally liable for the amount of the contributions, withholdings, penalties, and interest due and unpaid by such employing unit. The director may assess such officer, stockholder, or other person for the amount of such contributions, withholdings, penalties, and interest. The provisions of Article 8 (commencing with Section 1126) and Article 9 (commencing with Section 1176) of Chapter 4 of Part 1 apply to assessments made pursuant to this section. Sections 1221, 1222, 1223, and 1224 shall apply to assessments made pursuant to this section. With respect to such officer, stockholder, or other person, the director shall have all the collection remedies set forth in this chapter.”

The the BOE and California sales taxes, California Revenue & Taxation Code § 6829 provides that:

“(a) Upon the termination, dissolution, or abandonment of the business of a corporation, partnership, limited partnership, limited liability partnership, or limited liability company, any officer, member, manager, partner, or other person having control or supervision of, or who is charged with the responsibility for the filing of returns or the payment of tax, or who is under a duty to act for the corporation, partnership, limited partnership, limited liability partnership, or limited liability company in complying with any requirement of this part, shall, notwithstanding any provision in the Corporations Code to the contrary, be personally liable for any unpaid taxes and interest and penalties on those taxes, if the officer, member, manager, partner, or other person willfully fails to pay or to cause to be paid any taxes due from the corporation, partnership, limited partnership, limited liability partnership, or limited liability company pursuant to this part.”

How do I become liable for the trust fund recovery penalty?

Generally speaking the government must prove 2 elements to find you personally liable for the trust fund recovery penalty:

In general, the question is if the individual(s) have the ability to direct payments to creditors. A responsible person has:

  • Duty to perform
  • Power to direct the act of collecting trust fund taxes
  • Accountability for and authority to pay trust fund taxes, or
  • Authority to determine which creditors will or will not be paid

Potential responsible persons can include:

  • Officer or employee of a corporation
  • Partner or employee of a partnership
  • Corporate director or shareholder
  • Employee of a sole proprietorship
  • Surety lender
  • Payroll Service Provider (“PSP”)
  • Responsible persons within a PSP
  • Professional Employer Organizations (“PEO”)
  • Responsible parties within a PEO

Some of the indicators of that a person is a responsible party include:

  • Authority to sign checks
  • Control financial affairs of business
  • Authority listed in by-laws
  • Ability to hire and fire employees
  • Sign 941’s
  • Make EFTPS payments


Willfulness may generally be established in one of two ways:

  • the responsible person had actual knowledge that the taxes were due and the funds were used to pay other expenses, or
  • the responsible person acted with reckless disregard as to whether the trust taxes were being paid to the government.

Within the second type of willfulness, a person could be liable under the reckless disregard standard if he or she:

  • Clearly ought to have known that
  • There was a grave risk that trust taxes were not being paid, and
  • He or she was in a position to find out for certain, or very easily.

According to the IRS’s Internal Revenue Manual, willfulness is proven as follows:

“To show willfulness, the government generally must demonstrate that a responsible person was aware, or should have been aware, of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. A responsible person’s failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid satisfies the TFRP “willfulness” element. “Willfulness” is the attitude of a responsible person who with free will or choice either intentionally disregards the law or is plainly indifferent to its requirements.”

Some of the factors that can indicate willfulness that the IRS may focus on include:

  • Whether the responsible person had knowledge of a pattern of noncompliance at the time the delinquencies were accruing.
  • Whether the responsible person had received prior IRS notices indicating that employment tax returns have not been filed, or are inaccurate, or that employment taxes have not been paid.
  • The actions the responsible party has taken to ensure its Federal employment tax obligations have been met after becoming aware of the tax delinquencies.
  • Whether fraud or deception was used to conceal the nonpayment of tax from detection by the responsible person.

How does the IRS investigate and assess civil liability under IRC § 6672?

The investigation of the trust fund recovery penalty is generally conducted by an IRS Revenue Officer. Two of the common techniques used include summonsing bank records and conducting a “4180 Interview.” During the 4180 Interview, the Revenue Officer will ask the target certain questions like:

  • Did individual(s) determine financial policy for business, and if so, from what dates?
  • Did individual(s) direct or authorize payments of bills/creditors, and if so, from what dates?
  • Did individual(s) prepare, review, sign, or authorize transmit payroll tax returns, and if so, from what dates?
  • Did individual(s) authorize payroll, and if so, from what dates?
  • Did individual(s) authorize or make Federal Tax Deposits, and if so, from what dates?
  • Did individual(s) authorize the assignment of any EFTPS or electronic banking PINS/passwords, and if so, from what dates?
  • Did individual(s) have authority or PIN assignment on bank accounts?
  • During the time the delinquent taxes were increasing, or at any time thereafter, were any financial obligations of the business paid (such as rent, mortgages, utilities, vehicle or equipment loans, or payments to vendors)?
  • Were all or a portion of the payrolls met?
  • Did any person or organization provide funds to pay net corporate payroll?
  • When and how did the individual(s) become aware of the unpaid taxes?
  • What actions did the individual(s) attempt to see that the taxes were paid?
  • Were discussions ever held by stockholders, officers, or other interested parties regarding nonpayment of the taxes?
  • Who handled IRS contacts such as phone calls, correspondence, or visits by IRS personnel?

After the investigation, but before the trust fund recovery penalty can be assessed, a taxpayers must be mailed or hand delivered a 60-Day Notice of Proposed Assessment, Letter 1153(DO), which advises taxpayers of the proposed penalty and of their appeal rights.

Can I appeal a proposed trust fund recovery penalty?

Yes. Generally speaking if there are both pre-assessment, Fast Track Mediation, and post-assessment appeal rights.

Taxpayers need to be aware of certain unique rules related to post-assessment appeals, because as a general rule, a taxpayer must pay his or her full tax liability before filing suit in federal court.

There is, however, an exception to this general rule when a penalty is a “divisible tax,” one example of which is a § 6672 assessment arising from an employer’s failure to remit withholding taxes for a group of employees. This exception to the full-payment rule derives from the premise that a § 6672 assessment is a “cumulation of separable assessments for each employee from whom taxes were withheld.” Boynton v. U.S., 566 F.2d 50, 51 (9th Cir.1977). Accordingly, the payment of one employee’s withholding tax satisfies the full-payment rule for that employee. This one employee essentially serves as a “test case” by enabling employers “to seek resolution of an employment tax dispute … without the necessity of paying up front the entire amount at issue.” Dixon v. Commissioner, 141 T.C. 3 (2013).

If you are interested in learning more about the IRS’s Trust Fund Recovery Penalty, or have received a 1153(DO) letter, please feel free to contact us today for a free consultation.