Understanding Trust Fund Penalty Liability

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Federal tax law mandates that employers withhold payroll taxes from employees’ wages for the government’s account.[1]If your company is required to withhold, account for, and pay taxes— including non-resident alien withholding and employment taxes—but willfully fails to do so, you may be held personally liable for a penalty equal to the full amount of the unpaid trust fund tax.[2]

Withheld taxes—typically payroll taxes—are known as “trust fund taxes” because the employer holds the employees’ money (federal income taxes and the employee portion of Federal Insurance Contributions Act (FICA) taxes) in trust until a federal tax deposit of that amount can be delivered.[3]This post examines how the trust fund penalty applies and what can happen when a responsible person fails to pay over these amounts. For some of our prior posts on the topic, see Employment Tax Enforcement is Trending, Employment Tax Enforcement is on the Rise, and The Crime of Willfully Failing to Collect or Pay Over Tax.


The key to understanding the trust fund penalty and its application requires understanding two critical terms: “responsible person” and “willfully.”[4]

Responsible Person

Liability under 26 U.S.C. § 6672 is limited to persons “responsible” for collection of third party taxes. To be liable under this statute, it’s not necessary that a person have all three duties of collecting, truthfully accounting for, and paying over be applicable to person with respect to tax dollars in question.[5]A responsible person can be a corporate officer, a partner, a sole proprietor, or an employee of any type of business.[6]A trustee or agent with authority over the funds of the business can also be held responsible for the penalty.[7]

The IRS and the courts both generally take a broad view of the definition of a “responsible person.”[8]The key element is whether an individual has a duty to make the tax payments.[9]Courts will look at several factors in determining whether an individual is a “responsible person” under section 6672.[10]These include whether the person was a substantial stockholder, participated in daily management of the company, determined creditor payments, had the authority to hire and fire employees, and had check-writing authority.[11]  These factors are not necessary in the IRS’s view, but are often viewed as indicators of “responsible person” status.  The IRS has even found accountants and employees to be responsible persons.

Note that the IRS maintains that the delegation of the responsibility to pay employment tax isn’t a viable defense where a taxpayer takes no steps to confirm that taxes were paid. The IRS takes the position that actual knowledge of a tax liability creates a duty to act.[12]However, individuals who are non-owner employees performing ministerial acts without exercising independent judgment should generally not be deemed responsible.[13]

It’s also important to note the statute’s use of the term “any person” because section 6672(a) allows the IRS to pierce the corporate veil and proceed against any person who is responsible for the corporation’s failure to pay over trust fund taxes—thus making that person personally liable for the employer’s unpaid payroll taxes.[14]As such, the penalty can be imposed on any responsible person without regard to the form of the business entity.


The term “willfully” for purposes of this statute means voluntarily, consciously, and intentionally. An individual is acting willfully, according to the IRS, if she pays other expenses of her business rather than the withholding taxes.[15] The IRS is not required to prove that the person had bad faith or a bad purpose.[16]Willfulness is also established by a showing of “reckless disregard.”[17]Further, under the IRS’s view, the financial circumstances of the person or the company for which she is acting are not considered when determining whether her failure to pay the tax was willful.[18]

Both the responsible person and the willful tests must be satisfied for the trust fund recovery penalty to apply. Once the penalty is assessed, the individual held responsible for the failure has the burden of disproving both elements.[19]

Penalties for Non-Compliance

Section 6672(a) imposes a penalty equal to the total amount of the taxes in question upon a responsible person,[20]but the IRS is not allowed to collect and retain amounts in excess of the unpaid trust fund taxes.[21]

The remedy afforded the IRS in section 6672 to impose a penalty upon corporate officials responsible for a company’s failure to withhold and pay over taxes is separate and distinct from any other remedy afforded the IRS.[22]

As you might expect, the IRS aggressively pursues the trust fund penalty. These payroll taxes are funds the government believes are rightfully owed to it, and there are is a long history of the agency’s relentless pursuit to collect amounts owed.[23]And the penalty isn’t dischargeable in bankruptcy.[24]

Failing to pay trust fund taxes can also result in criminal charges. Under section 7202, a willful failure to pay over or collect tax is a felony punishable by up to a $10,000 fine or five years in prison, or both.[25]

A responsible person subject to a criminal trust fund prosecution, (see our Insights posts on, Another Trust Fund-Related Tax Indictment and Government Report Recommends More Criminal Referrals for Employment Tax Violations) may be required to pay restitution[26]in addition to a prison sentence.


It’s important to remember that individuals who are “responsible persons” must collect and pay payroll taxes; if they fail to do so, they may be liable for the 100% trust fund penalty under section 6672—and the definition of “responsible person” has been broadly interpreted by both the IRS and the courts.

Both elements of the trust fund penalty must be satisfied: in addition to being a “responsible person,” the taxpayer must also have willfully failed to pay the tax.[27]

Finally, the trust fund penalty should be taken seriously: the IRS is aggressive in collecting these taxes.[28]Both civil and criminal penalties may be imposed.


Probate Trust and Fiduciary Litigation Lawyers

Need assistance managing probate proceedings, will contests, trust, and fiduciary litigation, or disputes involving the administration of estates and trusts. Freeman Law represents executors, administrators, trustees, beneficiaries, and heirs. Our Firm offers a unique blend of legal skills and an accounting background. This combination positions our Firm to represent clients in even the most complex probate, trust, and fiduciary litigation. Schedule a consultation or call (214) 984-3000 to discuss your probate and fiduciary litigation needs.


[1]26 U.S.C. 6672(a) (“any person required to collect, truthfully account for, and pay over any tax imposed by” the Internal Revenue Code who willfully fails to do so, will, “in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax … not collected … and paid over.”).

[2]IRS Website, Trust Fund Recovery Penalty (Page Last Reviewed or Updated: May 2, 2018).

[3]Slodov v. United States, 436 U.S. 238, 240, 98 S.Ct. 1778, 1782 (1978). See discussion of Slodovin Begier v. United States IRS, 878 F.2d 762, 763 (3d Cir. 1989) (pre-petition payments of debtor’s employees’ withholding taxes and excise taxes collected from its airline passengers were funds required to be held in trust for appellant IRS and were not preferential transfers of debtor’s property). See also Brown v. Commissioner, No. 15627-15, 2017 Tax Ct. Memo LEXIS 18, at *3 (T.C. Jan. 24, 2017); Mason v. Commissioner,132 T.C. 301, 321 (2009).

[4]See, e.g., In re Bowman,308 BR 37 (Bankr. Neb. 2003) (To be found as “responsible person” liable to IRS under 26 USCS § 6672, one must have authority to control use of corporate funds and willfully fail to pay IRS obligations.); Stake v United States, 347 F.Supp 823 (D. Minn. 1972) (Two elements are necessary to make 26 U.S.C. § 6672 applicable to taxpayer: first, individual must have authority to direct or control payment of corporate funds, and second, such responsible person must willfully fail to comply with tax withholding statutes.).


[6]26 U.S.C. § 6671(b).

[7]26 U.S.C. § 7701(a)(1). See generally Carella v. Tomlinson,66-2 USTC P 9517, 18 AFTR 2d 5096 (S.D. Fla. 1966) (“Responsible person” for purposes of 26 U.S.C. § 6672 is any person connected or associated with employer in such manner that he or she has power to see taxes are paid.).

[8]Shaffran v. Commissioner,T.C.M. 2017-35 (2017) (case demonstrates the broad discretion that the IRS has in pursuing responsible person assessments to collect employment taxes that are not withheld and paid over to the IRS).

[9]O’Connor v. United States, 956 F.2d 48, 51 (4th Cir. 1992).

[10]See, e.g., United States v. Chapman, 7 Fed. Appx. 804 (9thCir. 2001); Labowitz v. United States,352 F.Supp. 202 (S.D.N.Y. 1972); Braden v. United States318 F.Supp. 1189 (S.D. Ohio 1970), affd442 F.2d 342 (6thCir. 1971),cert den 404 U.S. 912, 30 L.Ed. 2d 185, 92 S.Ct. 229 (1971).

[11]See Scott E. Vincent, Report:Taxes In Your Practice: Tax Court Rejects IRS Assessment of Trust Fund Recovery Penalty,73 J. Mo. B. 120 (March-April 2017).

[12]Dougherty v United States18 Cl. Ct. 335 (1989),affd without op, 914 F.2d 271 (1990).

[13]IRS Policy Statement 5-14 (Internal Revenue Manual § P-5-60). Retrieved at https://www.irs.gov/irm/part1/irm_01-002-014. See Fitzpatrick v. Commissioner,No. 9433-13L, 2016 Tax Ct. Memo LEXIS 196, at *1 (T.C. Nov. 2, 2016).

[14]White v. United States,178 Ct. Cl. 765, 784, 372 F.2d 513, 522 (1967).

[15]26 U.S.C. § 7202.

[16]Dillard v Patterson,326 F2d 302 (6thCir. (Ala.) 1963) (it’s not necessary that there be present intent to defraud or deprive United States of taxes; it’s not necessary that bad motives or wicked design be proved);In re Thompson, 37 B.R. 211 (Bankr. M.D. Fla. 1983) (no requirement of bad motive or specific intent to defraud government or deprive it of revenue).

[17]Phillips v United States IRS,73 F.3d 939 (9thCir. (Haw.) 1996).

[18]Wright v United States,809 F.2d 425 (7thCir. (Ill.) 1987).

[19]Ruth v United States,823 F.2d 1091 (7thCir. (Ill.) 1987).

[20]See Seth Kossman, A Trust Fund Recovery Penalty Primer, The Tax Adviser (September 30, 2012).

[21]See Steve R. Johnson, Reasoned Explanation and IRS Adjudication, 63 Duke L.J. 1771(May 2014). See, e.g., Allan v. United States, 386 F. Supp. 499, 501 (N.D. Tex. 1975), aff’d, 514 F.2d 1070 (5thCir. 1975). See generally David M. Richardson, Jerome Borison & Steve Johnson, Civil Tax Procedure 93-133, 207-33(2d ed. 2008).

[22]United States v Huckabee Auto Co.46 B.R. 741(Bankr. M.D. Ga. 1985), affd783 F.2d 1546(11thCir. (Ga.) 1986).

[23]See, e.g., In re Serrano, 545 B.R. 447, 447 (Bankr. D.P.R. 2016) (debtor, as president of company, was personally liable for the trust fund taxes which were withheld by the company but were not remitted to Treasury); Morgan v. Commissioner, No. 8441-10L, 2011 Tax Ct. Memo LEXIS 285, at *1 (T.C. Dec. 19, 2011) (court found that the Commissioner’s actions in sustaining the levy were appropriate and not an abuse of discretion);Jefferson v. United States,459 F. Supp. 2d 685, 687 (N.D. Ill. 2006) (president “willfully” failed to pay the delinquent taxes within the meaning of § 6672(a); he was aware of a prior tax delinquency but did not implement financial controls to ensure that future tax payments were made, and he did not make efforts to ascertain the status of the organization’s tax payments).

[24]United States v Sotelo, 436 U.S. 268, 56 L.Ed.2d 275, 98 S.Ct. 1795 (1978), reh den438 U.S. 907, 57 L.Ed. 2d 1150, 98 S.Ct. 3126 (1978). See also In re Pierce Coal & Constr., Inc.,49 B.R. 779 (Bankr. N.D. W.Va. 1985),affdGoodman v. United States (In re Pierce Coal & Constr.), 1990 U.S. Dist. LEXIS 6413 (N.D. W.Va. 1990).

[25]26 U.S.C. § 7202.

[26]See, e.g., United States v. Cottingham, 318 F. App’x 159, 161 (4thCir. (S.C.) 2008).Note that a taxpayer has the opportunity to dispute his liability for a trust fund recovery penalty when he receives a Letter 1153. Thompson v. Commissioner,T.C. Memo 2012-87, 103 T.C.M. (CCH) 1470, 1472 (2012); see also Pough v. Commissioner,135 T.C. 344, 349 (2010). Upon receiving a Letter 1153, the taxpayer may appeal the IRS determination of TFRP liability by submitting a protest to the IRS Appeals Office. If a taxpayer fails to avail himself of this opportunity, he’s not entitled to later challenge to his liability before the Appeals Office or the U.S. Tax Court. Woodley v. Commissioner,No. 20343-15L, 2017 Tax Ct. Memo LEXIS 242, at *1 (T.C. Dec. 6, 2017), citing Thompson, 103 T.C.M. (CCH) at 1472.

[27]See generally, Kevin M. Flynn, The Trust Fund Recovery Penalty,The CPA Journal (November 2017). Vani Murthy, The Consequences of Willful Failure to Pay Payroll Taxes,The Journal of Accountancy (May 31, 2014).

[28]See Rebollo, supra (“Proposed assessments of the Trust Fund Recovery Penalty (TFRP) are one of the most serious tax matters a client may encounter.”).