The trust fund penalty, officially known as the Trust Fund Recovery Penalty (TFRP), is a severe personal liability imposed by the IRS on individuals responsible for collecting, accounting for, and paying payroll taxes (including income, Social Security, and Medicare taxes) but who fail to do so. This penalty applies to “responsible persons” within a business or organization, including business owners, officers, and payroll managers, who have control over payroll decisions.
Payroll taxes are considered trust fund taxes because they are withheld from employees’ wages and held in trust by the employer until they are paid to the IRS. When a business fails to remit these taxes, the IRS can assess the Trust Fund Recovery Penalty, which is equal to 100% of the unpaid trust fund taxes.
The penalty is imposed on individuals who:
- Willfully fail to collect or pay over trust fund taxes.
- Intentionally misuse withheld payroll taxes for other purposes, such as paying business expenses.
The TFRP can have devastating financial consequences for the individuals held liable, as it can result in personal asset seizures, wage garnishments, and tax liens. To avoid the trust fund penalty, businesses must ensure that payroll taxes are remitted on time and accurately, and they should consult a tax professional if they face cash flow issues that prevent timely payment.