Trust Fund Recovery Penalty (IRC 6672): When the IRS Comes After You Personally for Payroll Taxes

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated September 23, 2026 ·10 min read

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

The trust fund recovery penalty is the IRS’s method for piercing the corporate veil on payroll taxes. Under IRC 6672, when an employer withholds income tax and FICA from employees’ paychecks, those funds are held in trust for the federal government under IRC 7501. If the employer fails to pay these trust fund taxes to the IRS, any person who was required to collect, truthfully account for, or pay over the tax, and who willfully fails to do so, is personally liable for a penalty equal to 100% of the unpaid trust fund portion. This is not a penalty in the traditional sense, it is a mechanism for the IRS to collect unpaid taxes from individuals when the business cannot or will not pay. The trust fund portion includes the employee’s share of Social Security tax, the employee’s share of Medicare tax, and the federal income tax withheld from the employee’s wages. It does not include the employer’s matching share of FICA. The penalty can be assessed against multiple responsible persons, and the IRS can collect the full amount from each one (joint and several liability with the right of contribution among co-liable persons).

✓Key takeaway

What constitutes the “trust fund” portion:

Tax	Trust Fund?	Amount (on $10,000 gross wages)
Federal income tax withholding	Yes	~$1,500-2,500 (varies by W-4)
Employee Social Security (6.2%)	Yes	$620
Employee Medicare (1.45%)	Yes	$145
Employer Social Security (6.2%)	No	$620 (not assessable as TFRP)
Employer Medicare (1.45%)	No	$145 (not assessable as TFRP)
FUTA	No	$42 (not trust fund)
Total trust fund per $10,000 payroll		~$2,265-$3,265

The two elements of IRC 6672:

Element	Definition
Responsible person	Anyone with authority to determine which creditors are paid; includes owners, officers, directors, and any person with signature authority on bank accounts or decision-making power over disbursements
Willfulness	Knowledge that trust fund taxes were due and voluntary, conscious, and intentional decision to use available funds for other purposes; does NOT require evil intent or fraudulent motive

Who does the IRS target for the TFRP?

Hypothetical example

Round numbers. A small business with 10 employees fails to pay payroll taxes for 4 quarters. The business has an owner, a CFO, and a bookkeeper.

Unpaid trust fund taxes:

Quarter	Gross Payroll	Trust Fund Taxes Due	Cumulative
Q1 2025	$200,000	$30,000	$30,000
Q2 2025	$200,000	$30,000	$60,000
Q3 2025	$200,000	$30,000	$90,000
Q4 2025	$200,000	$30,000	$120,000

Total employer payroll tax liability (trust fund + employer share):

Component	Amount
Trust fund taxes (employee withholding + employee FICA)	$120,000
Employer share of FICA	$30,600
FUTA	$1,680
Late deposit penalties	~$18,000
Interest	~$6,000
Total business liability	~$176,280

TFRP assessment against individuals:

Person	Role	TFRP Assessed	Personal Liability
Owner	Signed checks, made all financial decisions	$120,000	Full amount
CFO	Determined which bills to pay, had bank signature authority	$120,000	Full amount
Bookkeeper	Prepared payroll, processed payments, had access to online banking	$120,000 (if had decision-making authority)	Full amount

Each person is liable for the full $120,000. The IRS can collect from any or all of them. If the owner pays $120,000, the owner can seek contribution from the CFO and bookkeeper.

The Form 4180 interview: The IRS conducts a TFRP investigation by interviewing each potentially responsible person using Form 4180 (Report of Interview to Determine Willfulness):

Question Area	What the IRS Asks
Authority	Who had authority to sign checks, authorize payments, and hire/fire employees?
Knowledge	Did you know the payroll taxes were not being paid?
Decision-making	Who decided which bills to pay when funds were limited?
Bank accounts	Who had signature authority on business bank accounts?
Other payments	Were other creditors (suppliers, rent, utilities) paid while payroll taxes went unpaid?
Financial condition	Was the business solvent during the period?
Remedial action	What did you do when you learned taxes were unpaid?

Who is a “responsible person”?

Person	Typically Responsible?	Why
Sole proprietor	Always	Complete authority over all business decisions
Corporate officer (CEO, CFO, President)	Almost always	Authority to direct payments
Director	Sometimes	If actively involved in financial decisions
Shareholder (non-officer)	Sometimes	If had actual authority over payments
Bookkeeper	Sometimes	If had independent authority to decide which creditors to pay (not if merely following orders)
Outside accountant/CPA	Rarely	Only if had actual authority to direct payments (not just advisory)
Payroll service provider	Rarely	Only if funds were entrusted and misappropriated
Spouse (non-employee)	Rarely	Only if had signature authority and actually made payment decisions
Lender	Rarely	Only if controlled the company’s disbursements

“Willfulness” in practice:

Scenario	Willful?	Why
Owner knew taxes were unpaid, paid rent and suppliers instead	Yes	Chose to pay other creditors over IRS
Owner directed bookkeeper to “hold off on the IRS this month”	Yes	Conscious decision
CFO prioritized vendor payments to keep business operating	Yes	Voluntary allocation of funds
Bookkeeper processed payroll but did not have authority to decide payment priority	No (may not be responsible)	Lacked authority element
Owner was unaware taxes were unpaid (trusted bookkeeper completely)	Maybe	Depends on whether owner had duty to oversee; reckless disregard can be “willful”
Business had no funds to pay anything (truly insolvent)	No (may defeat willfulness)	No available funds to allocate = no willful failure

Defense strategies:

Defense	When It Works
Not a responsible person	Demonstrate lack of authority to direct payments
Not willful	Demonstrate lack of knowledge (genuine ignorance, not reckless disregard)
No available funds	Prove the business had zero funds to pay any creditor during the period
Reasonable cause	Reliance on a payroll service that failed (limited success)
Voluntary payment / IRS payment designation	Voluntary payments can be designated to trust fund taxes first (reducing TFRP exposure)
Offer in compromise	Negotiate a reduced settlement if full payment creates economic hardship
Installment agreement	IRS allows payment plans for assessed TFRP

Collection actions the IRS can take against responsible persons:

Action	Details
Federal tax lien (NFTL)	Filed against the individual’s personal property and credit
Levy on bank accounts	IRS can seize personal bank accounts
Wage garnishment	IRS can levy the individual’s wages from another employer
Seizure of personal assets	Home, vehicles, investment accounts (with court order for residence)
Passport revocation/denial	IRC 7345: IRS can certify seriously delinquent tax debt to State Department
Offset of refunds	Future tax refunds applied to the TFRP balance

Statute of limitations:

Rule	Period
Assessment of TFRP	3 years from the later of: the due date of the return or the date the return was filed
Collection of TFRP	10 years from assessment (can be extended by agreement or other actions)

Prevention measures:

Action	How It Protects
Use a reputable payroll service with impound accounts	Funds are segregated and deposited automatically
Verify deposits are being made (check EFTPS account directly)	Do not rely solely on the payroll service’s confirmation
Never use trust fund taxes for operating expenses	Even in a cash crunch, the IRS should be paid first
If the business cannot afford payroll taxes, do not run payroll	Reducing staff or suspending operations is better than accruing TFRP
Document your role and authority	If you are not a decision-maker, document that in writing
If you discover unpaid taxes, act immediately	Contact IRS, make arrangements, stop the bleeding

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

What payroll tax obligations does an employer have?

Employers must withhold federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) from employee wages, then match the Social Security and Medicare portions from their own funds. The employer’s total payroll tax cost is at least 7.65% of wages on top of what the employee pays. Federal unemployment tax (FUTA) adds 6% on the first $7,000 of each employee’s wages, reduced to 0.6% in states with approved unemployment programs (most states). Payroll taxes must be deposited on a semi-weekly or monthly schedule depending on your total tax liability, and late deposits trigger escalating penalties (2% to 15%). Officers and other “responsible persons” who willfully fail to collect and remit payroll taxes face the trust fund recovery penalty (IRC 6672), which is 100% of the unpaid trust fund taxes and is assessed personally.

Should I use a revocable or irrevocable trust for estate planning?

A revocable living trust avoids probate and provides management continuity if you become incapacitated, but offers no tax benefits because the assets are still in your taxable estate. An irrevocable trust removes assets from your estate, potentially reducing estate tax, and can protect assets from creditors. The trade-off is control: you cannot easily modify or revoke an irrevocable trust. For most small business owners below the estate tax exemption ($13.61 million in 2024), a revocable trust paired with proper beneficiary designations is sufficient. Business owners above the exemption (or expecting to exceed it before the 2026 sunset) should consider irrevocable structures like GRATs, SLATs, or intentionally defective grantor trusts.

How does the lifetime gift and estate tax exemption work for business owners?

The combined lifetime gift and estate tax exemption for 2025 is $13.99 million per individual ($27.98 million for married couples), meaning you can transfer this amount during life or at death without owing federal gift or estate tax. Gifts to individuals up to the annual exclusion ($19,000 per recipient for 2025) don’t count against your lifetime exemption and don’t require a gift tax return. The current elevated exemption is set to sunset after 2025 under the Tax Cuts and Jobs Act, potentially dropping to approximately $7 million (indexed for inflation), which creates urgency for business owners to lock in transfers at today’s higher levels. Transferring discounted interests in a family business entity (LLC or FLP) can leverage the exemption because valuation discounts for lack of marketability and lack of control can reduce the taxable value of the transferred interest by 25-40%.

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Cite this page

Yarik Yarosh, CPA. "Trust Fund Recovery Penalty (IRC 6672): When the IRS Comes After You Personally for Payroll Taxes." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-trust-fund-recovery-penalty-irc-6672-responsible-person

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