The Trust Fund Recovery Penalty: Avoiding Personal Liability For Unpaid Employment Taxes

The Internal Revenue Service is deadly serious about collecting all the employment taxes it is due. HR professionals and their payroll counterparts need to ensure that there is an effective system in place to calculate, withhold, and remit employee payroll taxes.

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Employers are required by federal law to withhold federal income taxes (FITW) and the employee portion of FICA (Social Security and Medicare) taxes when services are performed and wages paid. Employers that fail to withhold employee taxes become themselves liable for the outstanding amounts. Federal employment taxes employers are required to withhold from employees' wages are known as “trust fund taxes” because the employer is required to hold these monies in trust for the federal government. Under the Internal Revenue Code, employers are required to “collect, truthfully account for, and pay over” these taxes.

100 percent of taxes owed can be assessed against the person responsible for collecting them. The trust fund recovery penalty, IRC Section 6672, was developed as a means to ensure that the Internal Revenue Service receives the full amount of FITW and FICA due in situations where an employer has willfully failed to collect and/or remit these taxes. The trust fund penalty was formerly known as the “100 percent penalty” because 100 percent of the trust fund taxes owed can be assessed against the person or persons within an organization responsible for collecting and remitting the 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 strategic white paper reviews, in detail, who can be considered a responsible person under Section 6672 and under what conditions failure to withhold and/or remit employment taxes can be considered “willful.” Information is also provided on how IRS revenue agents apply the penalty against responsible persons in tax withholding failures and what avenues of relief are available for individuals against whom the penalty is levied.

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