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Trust Fund Recovery Penalty: Personal Liability for Unpaid Payroll Taxes (IRC 6672)

By Yarik Yarosh, CPA ·September 5, 2026 ·3 min read
Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The Trust Fund Recovery Penalty (TFRP) under IRC 6672 is one of the most severe penalties in the Internal Revenue Code. It makes individuals personally liable for 100% of the employee’s share of payroll taxes (income tax withholding and the employee’s share of FICA) that the business fails to remit to the IRS. The penalty is assessed against “responsible persons” who “willfully” fail to collect, truthfully account for, or pay over the trust fund taxes.

This penalty pierces the corporate veil. It does not matter whether the business is an LLC, corporation, or partnership. The individual responsible for payroll tax compliance is personally liable, and the penalty cannot be discharged in bankruptcy under 11 USC 523(a)(1).

✓Key takeaway

Trust Fund Recovery Penalty key facts:

  1. What is a “trust fund” tax? The employee’s share of payroll taxes: federal income tax withheld from wages, the employee’s share of Social Security tax (6.2%), and the employee’s share of Medicare tax (1.45%). These taxes belong to the government from the moment they are withheld; the employer holds them “in trust” until deposited.

  2. What is NOT a trust fund tax? The employer’s share of FICA (6.2% + 1.45%) and FUTA (6.0%). These are the employer’s own tax obligations, not trust fund taxes. However, the employer is still liable for these taxes (just not under the TFRP).

  3. Who is a “responsible person”? Anyone who has the authority to determine which creditors get paid. Typically: business owners, officers (CEO, CFO, controller), and sometimes bookkeepers or payroll managers who have signatory authority on the business bank account.

  4. What is “willful”? The standard is lower than criminal willfulness. It means the responsible person knew or should have known the taxes were due and either chose to use the funds for other purposes or was reckless in failing to ensure payment. Paying other creditors (suppliers, rent, loans) instead of the IRS is willful.

  5. Penalty amount: 100% of the unpaid trust fund taxes. This is not an additional penalty on top of the tax; it is a separate assessment equal to the unpaid amount, imposed on the responsible person individually.

How does TFRP work in practice?

How to avoid TFRP exposure

  1. Always deposit payroll taxes on time (use EFTPS for federal deposits)
  2. Never “borrow” from payroll tax deposits to cover other business expenses
  3. If cash flow is tight, pay the trust fund taxes FIRST, before any other creditor
  4. If the business cannot afford payroll, reduce hours or lay off employees rather than accumulating unpaid payroll tax
  5. Monitor the payroll service provider (a third-party payroll company’s failure to deposit is still the employer’s responsibility)

Related guides:

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Cite this page

Yarik Yarosh, CPA. "Trust Fund Recovery Penalty: Personal Liability for Unpaid Payroll Taxes (IRC 6672)." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-irs-trust-fund-recovery-penalty

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.