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

By Yarik Yarosh, CPA ·September 5, 2026 ·9 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 aggressive collection tools in the IRS arsenal, and it pierces every form of liability protection: corporate veils, LLCs, partnerships, and even bankruptcy. When a business withholds federal income tax and FICA from employee paychecks, those withheld funds are “trust fund” taxes, held in trust for the US government. If the business fails to remit those taxes to the IRS, the responsible persons (owners, officers, directors, and anyone with check-signing authority or the power to direct which bills get paid) become personally liable for 100% of the trust fund portion. The penalty isn’t a fraction of the tax or a separate charge; it’s the full amount of the unremitted trust fund taxes. The employer’s share of FICA (the matching 7.65%) isn’t a trust fund tax (it was never withheld from anyone), but the employee’s share of FICA plus all federal income tax withheld are trust fund taxes. The TFRP survives bankruptcy, meaning a business owner who owes trust fund taxes cannot discharge the liability by filing personal bankruptcy.

✓Key takeaway

Trust fund vs. non-trust fund payroll taxes:

Tax Component	Trust Fund?	Personally Liable (TFRP)?
Federal income tax withheld from employee	Yes	Yes (100%)
Employee share of Social Security (6.2%)	Yes	Yes (100%)
Employee share of Medicare (1.45%)	Yes	Yes (100%)
Employer share of Social Security (6.2%)	No	No (business liability only)
Employer share of Medicare (1.45%)	No	No (business liability only)
FUTA (federal unemployment, 6.0%)	No	No (business liability only)

Who is a “responsible person”?

Factor	Details
Authority over finances	Can sign checks, authorize payments, or control bank accounts
Decision-making power	Decides which creditors get paid when funds are limited
Title is irrelevant	Owners, officers, directors, bookkeepers, accountants, CFOs, even lenders can be responsible persons
Multiple persons	IRS can (and often does) pursue multiple responsible persons for the same liability
Good faith defense	Not available if the person knew the taxes were due and chose to pay other creditors first

Non-dischargeable in bankruptcy:

Tax Type	Dischargeable in Bankruptcy?
Trust fund taxes (TFRP)	Never
Employer’s share of payroll taxes	Sometimes (if older than 3 years and other conditions met)
Income taxes	Sometimes (if older than 3 years, filed on time, etc.)
Fraud penalties	Never

How does the TFRP work against a business owner?

Hypothetical example

Round numbers. A small business with 10 employees fails to remit payroll taxes for 2 quarters (6 months) before shutting down. The owner used the withheld taxes to pay vendors and keep the business running.

Unpaid payroll taxes (2 quarters):

Tax Component	Quarterly Amount	2 Quarters	Trust Fund?
Federal income tax withheld	$30,000	$60,000	Yes
Employee Social Security (6.2%)	$12,000	$24,000	Yes
Employee Medicare (1.45%)	$3,000	$6,000	Yes
Total trust fund	$45,000	$90,000	Yes
Employer Social Security (6.2%)	$12,000	$24,000	No
Employer Medicare (1.45%)	$3,000	$6,000	No
Total employer share	$15,000	$30,000	No
Total unpaid payroll taxes	$60,000	$120,000

What the business owes:

Item	Amount
Total payroll taxes	$120,000
Interest (~8% annualized, from due date)	$5,000+
Failure to deposit penalty (2-15%)	$12,000-$18,000
Failure to file penalty (5%/month on 941)	$6,000-$30,000
Total business liability	$143,000-$173,000

What the owner personally owes (TFRP):

Item	Amount
Trust fund taxes (TFRP)	$90,000
Interest on TFRP (from original due date)	$4,000+
Total personal liability	$94,000+

The business can go bankrupt and disappear. The $90,000+ personal liability follows the owner permanently.

The IRS investigation process:

Step	What Happens
1. IRS identifies unpaid payroll taxes	Computer-generated notice to the business
2. Revenue Officer assigned	IRS sends a Revenue Officer to investigate
3. Form 4180 interview	Revenue Officer interviews all potential responsible persons
4. Determination	IRS determines who is a responsible person
5. Letter 1153 (proposed assessment)	IRS proposes the TFRP against identified responsible persons
6. 60-day appeal window	Responsible person has 60 days to appeal to IRS Appeals
7. Assessment	If not appealed or appeal denied, TFRP is assessed against the person
8. Collection	IRS collects from personal assets: bank accounts, wages, property

Multiple responsible persons scenario: A business has 3 individuals with authority over finances:

Person	Role	Signed Checks?	Chose Which Bills to Pay?	TFRP Assessed?
Owner	CEO/sole shareholder	Yes	Yes	Yes ($90,000)
CFO	Manages finances	Yes	Yes	Yes ($90,000)
Bookkeeper	Processes payroll	Yes (authorized signer)	No (followed orders)	Maybe (depends on whether they had authority to direct payments)

Each responsible person is liable for the FULL $90,000 (not split). The IRS can collect from any or all of them until the full $90,000 is collected. If the owner pays $50,000 and the CFO pays $40,000, the liability is satisfied.

Prevention:

Action	Purpose
Use a reputable payroll service (Gusto, ADP, Paychex)	Payroll service remits taxes automatically; reduces risk of diversion
Fund payroll tax accounts immediately	Don’t commingle trust fund taxes with operating funds
Never pay vendors with withheld payroll taxes	This is the most common TFRP trigger
File 941 returns even if you can’t pay	Filing avoids the failure-to-file penalty; contact IRS to set up installment agreement
If struggling, pay trust fund taxes FIRST	Trust fund taxes have personal liability; vendor debts do not

If you already owe trust fund taxes:

Option	Details
Installment agreement (Form 9465)	Monthly payments over 6 years (72 months maximum for TFRP)
Offer in compromise (Form 656)	Settle for less than full amount (difficult; IRS considers ability to pay)
Currently not collectible (CNC)	IRS temporarily suspends collection if taxpayer has no ability to pay
Appeal (Form 12153, CDP hearing)	Contest the assessment through Collection Due Process
Federal court	Contest in US District Court or Court of Federal Claims

The payroll tax hierarchy when cash is short: When a business is struggling and cannot pay all bills, the priority should be:

Priority	Bill	Why
1	Trust fund payroll taxes (federal income tax withholding + employee FICA)	Personal liability, non-dischargeable in bankruptcy
2	Payroll (employee wages)	Legal obligation, morale, state wage laws
3	State payroll taxes	Similar personal liability provisions in most states
4	Employer share of payroll taxes	Business liability only, potentially dischargeable
5	Rent/essential operations	Keep the business running
6	Vendors	No personal liability

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

What are the penalties for late payroll tax deposits?

The IRS imposes graduated penalties for late payroll tax deposits: 2% if 1-5 days late, 5% if 6-15 days late, 10% if more than 15 days late, and 15% if still unpaid 10 days after the first IRS notice. These percentages apply to the unpaid deposit amount. The trust fund recovery penalty (IRC 6672) can hold owners, officers, and even bookkeepers personally liable for the employee’s share of unpaid payroll taxes, piercing the corporate veil entirely. This is one of the few tax penalties that cannot be discharged in bankruptcy.

How do I determine my payroll deposit schedule?

The IRS assigns businesses to either a monthly or semi-weekly deposit schedule based on the lookback period (the four quarters ending June 30 of the prior year). If total employment taxes during the lookback period were $50,000 or less, deposits are due monthly (by the 15th of the following month). Above $50,000, deposits follow a semi-weekly schedule (Wednesday/Friday based on payday). New businesses default to monthly. The schedule resets each calendar year. Regardless of schedule, accumulating $100,000 or more in undeposited taxes on any day triggers a next-business-day deposit requirement.

Related guides:

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): Personal Liability for Unpaid Payroll Taxes." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-trust-fund-recovery-penalty-payroll-tax-irc-6672

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