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

By Yarik Yarosh, CPA ·September 5, 2026 ·5 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 the most severe penalty in the payroll tax system. It makes individuals personally liable (not just the business) for the employee portion of payroll taxes that were withheld from employee wages but not paid to the IRS. The penalty is 100% of the unpaid trust fund taxes, it survives bankruptcy, and it can be assessed against multiple individuals simultaneously. No entity structure (LLC, S-Corp, C-Corp) protects against it.

✓Key takeaway

Trust fund recovery penalty framework:

What are trust fund taxes? The employee’s share of FICA taxes (Social Security and Medicare) and federal income tax withheld from employee wages. These are “trust fund” taxes because the employer holds them in trust for the government. The employer’s share of FICA is NOT a trust fund tax (it is a liability of the business, not a withheld tax).
The penalty amount. 100% of the unpaid trust fund taxes. If the business withheld $50,000 from employee paychecks and failed to remit it, the penalty is $50,000, assessed personally against the responsible person(s).
Who is a responsible person? Anyone who has the authority and duty to collect, account for, and pay the trust fund taxes. This includes:
- Business owners (sole proprietors, LLC members, corporate officers, partners)
- CFOs, controllers, bookkeepers with check-signing authority
- Anyone who directs which bills get paid when the business has limited funds
- Board members who participate in financial decisions
- Payroll service providers (in rare cases, if they had control over fund allocation)
Willfulness. The penalty requires “willfulness,” but the standard is low. Willfulness does not require fraudulent intent. It only requires that the responsible person knew or should have known that the trust fund taxes were due and voluntarily, consciously, and intentionally chose to use the funds for other purposes instead of paying the IRS. Paying rent, suppliers, or other creditors before paying payroll taxes is willful.
Multiple responsible persons. The IRS can assess the TFRP against every responsible person simultaneously. Each is liable for the full amount (joint and several liability). The IRS can collect from whichever person is easiest to collect from.
No bankruptcy discharge. TFRP liability survives Chapter 7 and Chapter 13 bankruptcy (IRC 523(a)(1)). It is one of the few tax debts that cannot be discharged.
The investigation process. The IRS sends Form 4180 (Report of Interview with Individual Relative to Trust Fund Recovery Penalty) to potential responsible persons. This interview determines who had authority, who made financial decisions, and who directed payments.

How does the TFRP assessment process work?

Hypothetical example

Round numbers. A small business (S-Corp) falls behind on payroll taxes during a cash flow crisis. The business has 10 employees with $20,000 in biweekly gross payroll.

Quarterly payroll taxes (1 quarter):

Federal income tax withheld: $15,000
Employee Social Security: $8,060 ($130,000 x 6.2%)
Employee Medicare: $1,885 ($130,000 x 1.45%)
Employer Social Security: $8,060
Employer Medicare: $1,885
Total quarterly 941 deposit: $34,890

Trust fund portion: $24,945 (employee withholding only: $15,000 + $8,060 + $1,885) Non-trust fund portion: $9,945 (employer’s share)

The business misses two quarters of deposits: $69,780 total, of which $49,890 is trust fund.

IRS investigation (Form 4180 interview):

The sole shareholder/president is identified as a responsible person
The bookkeeper who processed payroll and had check-signing authority is also identified as a responsible person
Both knew the deposits were not being made and directed cash to other obligations (rent, suppliers)

TFRP assessment:

Against the shareholder: $49,890
Against the bookkeeper: $49,890 (joint and several, same $49,890, not cumulative)
Both are personally liable for the full amount
The IRS can collect from either or both until the full $49,890 is satisfied

Additional consequences:

The business still owes: $49,890 in trust fund taxes + $9,945 x 2 = $19,890 in employer share + penalties and interest on the full amount
Total business liability (before TFRP): approximately $80,000-$90,000 with penalties and interest
If the business cannot pay, the IRS collects the TFRP from the personal assets of the shareholder and bookkeeper

Prevention: if the business cannot afford to pay all its bills, payroll tax deposits must be paid FIRST, before rent, before suppliers, before the owner’s draw. The IRS has no flexibility on trust fund taxes. An installment agreement on the employer’s share is possible, but not on the trust fund portion once the TFRP is assessed.

Illustrative numbers only, not a real client and not advice for your facts.

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Cite this page

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