Trust Fund Recovery Penalty

What is the Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty (TFRP), also known as the 100% penalty, is a penalty assessed against individuals who are responsible for collecting and paying employment taxes but fail to do so.

The penalty equals 100% of the unpaid trust fund taxes. It is assessed against individuals personally—not the business—and creates a separate tax liability that follows the individual regardless of what happens to the business.

The legal authority for TFRP is Internal Revenue Code Section 6672.

What are trust fund taxes?

Trust fund taxes are the portions of employment taxes that are withheld from employees' wages and held "in trust" by the employer for payment to the government:

• Federal income tax withholding — The amount withheld from employee paychecks based on W-4 elections
• Employee share of Social Security tax — 6.2% of wages up to the annual limit
• Employee share of Medicare tax — 1.45% of all wages

Not trust fund taxes: The employer's share of Social Security and Medicare taxes, and Federal Unemployment Tax (FUTA), are not trust fund taxes. These remain business obligations and generally do not create personal liability.

The distinction matters because only trust fund taxes can result in personal liability through the TFRP. The IRS allocates payments between trust fund and non-trust fund portions when determining TFRP liability.

Who is a responsible person?

A "responsible person" for TFRP purposes is anyone who has the duty to collect, account for, and pay trust fund taxes and has the authority to direct payment of creditors.

Common responsible persons include:

• Business owners (sole proprietors, partners, LLC members)
• Corporate officers (CEO, CFO, President, Treasurer)
• Directors with financial oversight
• Shareholders with operational control
• Employees with authority over finances (controllers, bookkeepers, office managers)
• Anyone who signs checks or has authority over bank accounts
• Anyone who determines which creditors to pay

Key indicators of responsibility:

• Signature authority on business bank accounts
• Authority to hire and fire employees
• Authority to sign checks or authorize payments
• Control over payroll or accounts payable
• Authority to decide which bills to pay when cash is limited

What does willful mean?

To be liable for TFRP, a responsible person must have "willfully" failed to collect or pay trust fund taxes. Willful does not require intent to defraud or evade taxes.

Willful means:

• Voluntary, conscious, and intentional (as opposed to accidental)
• Reckless disregard of a known or obvious risk
• Knowing taxes were due and choosing to pay other creditors instead

Examples of willful conduct:

• Paying rent, suppliers, or loans when you know payroll taxes are due
• Using payroll tax funds to keep the business operating
• Ignoring notices from the IRS about unpaid employment taxes
• Continuing to pay wages without making tax deposits

Defenses to willfulness are narrow: Reasonable cause (no knowledge of the duty or inability to pay) may be a defense, but it is difficult to establish. Reliance on a professional (accountant, payroll service) is generally not a defense—the responsible person has a duty to ensure taxes are paid regardless of delegation.

How the IRS investigates TFRP liability

When a business has unpaid employment taxes, the IRS initiates a TFRP investigation to identify responsible persons. This typically involves:

• Reviewing corporate documents (articles of incorporation, bylaws, meeting minutes)
• Examining bank records and signature cards
• Reviewing cancelled checks to identify who signed them
• Interviewing current and former employees, officers, and owners
• Requesting completion of Form 4180 (Report of Interview)

Form 4180 interview

Form 4180 (Report of Interview to Determine Willfulness) is a questionnaire the IRS uses to determine responsibility and willfulness. It asks about:

• Your position and duties with the company
• Your authority over financial matters
• Who made decisions about which bills to pay
• Your knowledge of unpaid payroll taxes
• What actions you took when you learned of the tax problem

Responses to Form 4180 are used as evidence in TFRP determinations. The IRS may also conduct in-person interviews with potential responsible persons.

Multiple responsible persons

The IRS can assess the full TFRP against every responsible person. There is no division of liability based on ownership percentage or involvement.

Example: A business has three equal owners who all have check-signing authority. The business owes $100,000 in trust fund taxes. The IRS can assess $100,000 against Owner A, $100,000 against Owner B, and $100,000 against Owner C. The IRS can collect from any or all of them until the full $100,000 is paid.

If one responsible person pays the full amount, they may seek contribution from other responsible persons through civil litigation—but that is a matter between the individuals, not a concern of the IRS.

TFRP assessment and collection

After investigation, if the IRS determines an individual is a responsible person who willfully failed to pay:

• Letter 1153 is sent proposing the TFRP assessment
• The individual has 60 days to appeal the proposed assessment
• If no appeal or appeal is unsuccessful, the TFRP is assessed
• Standard IRS collection procedures apply: notices, lien filing, levy authority

The TFRP creates a separate tax liability with its own 10-year collection statute of limitations (beginning from the date of assessment, not the original employment tax due date).

TFRP and bankruptcy

The Trust Fund Recovery Penalty is generally not dischargeable in bankruptcy.

• Chapter 7: TFRP survives discharge—the individual remains liable
• Chapter 13: TFRP must typically be paid in full as a priority tax debt
• Chapter 11: TFRP must be paid in full over the plan period

The non-dischargeable nature of TFRP makes it one of the most serious tax liabilities an individual can face. It persists regardless of business closure, personal bankruptcy, or other financial reorganization.

Examples of TFRP liability

Example 1: Active owner

Example 2: Passive investor

Example 3: Bookkeeper with authority