Overview

The IRS collects income tax withholding and employees’ share of Social Security/Medicare (FICA) as “trust fund” taxes. When an employer fails to remit those amounts, the IRS can assess the Trust Fund Recovery Penalty (TFRP) against any individual it finds both responsible for collecting/remitting the taxes and willful in allowing them to go unpaid (IRC §6672) (IRS). The penalty can equal 100% of the unpaid trust fund portion of payroll taxes.

Step-by-step: how the IRS typically proceeds

  1. Identification and audit: The IRS discovers unpaid employment taxes through a return, employer delinquency, or audit.
  2. Responsible-person analysis: Revenue officers interview staff and review records to identify people with the authority to collect, account for, and pay withheld taxes. Titles don’t control—actual authority and control do (for examples of responsible persons, see related guidance).
  3. Willfulness determination: The IRS looks for purposeful choices to use trust funds for another purpose, ignoring the employer’s inability to pay, or reckless disregard for tax obligations. A simple mistake or lack of knowledge is not automatically willfulness.
  4. Assessment and notice: If assessed, the IRS sends a Notice of Assessment explaining the TFRP and amount. That starts collection actions unless the assessment is timely disputed.

Who counts as a “responsible person”?

Anyone who had the duty and authority to: collect, account for, and pay over trust fund taxes can be a responsible person. That includes business owners, partners, corporate officers, payroll managers, or anyone who signed checks or controlled cash flow. The IRS examines job duties and authority rather than job title alone.

Willfulness—what the IRS looks for

Willfulness generally means a conscious, voluntary, and intentional decision to prefer other creditors over the government. Examples include diverting payroll taxes to meet vendor bills despite available funds, or failing repeatedly to investigate why payroll taxes were not paid.

How to challenge or limit an assessment

  • Administrative appeal: You can request an administrative appeal with IRS Appeals. The IRS also explains appeal rights in its notices and in IRS Publication 5 (Your Appeal Rights and How To Prepare a Protest) (IRS Pub. 5).
  • Collection Due Process (CDP): If you receive a Notice of Intent to Levy, you may request a CDP hearing (Form 12153) within the time window shown on the notice.
  • Claim for refund/abatement: If you’ve paid an assessed TFRP, you may seek refund or abatement (typically using Form 843 or other procedures described on IRS pages) and pursue administrative review or suit, including Tax Court where applicable.
  • Collection alternatives: If assessed liability is upheld, collection options can include installment agreements or Offers in Compromise in limited circumstances; consult a practitioner because approval standards vary for personal assessments.

Prevention and practical steps (quick checklist)

  • Separate payroll cash from operating cash: Treat withheld taxes as “off-limits” for general use.
  • Maintain clear records: Payroll registers, bank records, and check signing logs help prove lack of responsibility or willfulness.
  • Use internal controls: Restrict who can sign checks and approve transfers; document decisions about payroll funding.
  • Act early: If cash flow problems arise, consult a CPA, enrolled agent, or tax attorney before choosing to divert payroll funds.

Real-world perspective

In my practice helping small employers, I’ve seen TFRP assessments arise when owners prioritized vendors or rent during short-term cash shortages and lacked documentation showing they tried alternative funding. Early outreach to a tax professional and to the IRS—documenting attempts to collect funds or secure short-term financing—often improves the outcome.

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Authoritative sources

Professional disclaimer

This article is educational and does not replace personalized tax advice. For a definitive determination about liability, appeal options, or collection alternatives contact a qualified tax professional (CPA, enrolled agent, or tax attorney) who can review your records and represent you before the IRS.