The Trust Fund Recovery Penalty (TFRP) is a severe penalty assessed by the IRS against individuals who are responsible for collecting, withholding, and paying certain payroll taxes but fail to do so. This penalty is primarily associated with payroll taxes, including Social Security and Medicare taxes that employers are required to withhold from employees’ paychecks and remit to the IRS.
The TFRP can be assessed on any individual deemed to be responsible for collecting and paying the taxes, including business owners, officers, or other individuals in positions of financial control within a company. To impose the TFRP, the IRS must demonstrate that the individual:
- Was responsible for collecting, accounting for, or paying over payroll taxes.
- Willfully failed to comply with the tax payment obligation.
The penalty is equal to 100% of the unpaid trust fund taxes, making it one of the most severe penalties the IRS can impose. Once the TFRP is assessed, the IRS can take collection actions against the individual’s personal assets, such as levies and liens. To avoid the TFRP, businesses must ensure they remain compliant with payroll tax obligations and pay withheld taxes on time.