Federal taxes that employers are required to withhold from employees' pay—income, Social Security, Medicare, and railroad retirement taxes—are known as trust fund taxes because the employer holds these monies in trust for the federal government. Employers are legally required to withhold these taxes.

The trust fund recovery penalty is a collection device that permits recovery of the owed taxes from those responsible when the employer has willfully failed to withhold or deposit trust fund taxes. It used to be known as the “100 percent penalty” because 100 percent of the trust fund taxes owed is assessed against the person or persons whose obligation it is to collect and pay over the taxes. If a corporation or other business entity willfully fails to collect or pay these taxes, the trust fund recovery penalty can be assessed not only against the business itself, but against responsible officers, company employees, and even third parties, such as financial institutions and payroll vendors and their employees.

This payroll strategic whitepaper provides details of the trust fund recovery penalty and how it could affect payroll. It includes comprehensive treatment of who could be considered a responsible person under Section 6672, and how the term ‘‘willful’’ is being defined as it relates to the penalty.