Few IRS penalties are as severe (or as personal) as the Trust Fund Recovery Penalty (TFRP). This penalty applies when a business fails to turn over payroll taxes that were withheld from employees’ paychecks. Because these taxes are considered “trust fund taxes” (collected from employees and held in trust by the employer), the IRS takes nonpayment extremely seriously. 

How the Trust Fund Recovery Penalty Works 

When you collect taxes from employee paychecks, that money isn’t yours to keep. It belongs to the government. These must be remitted to the government and must be deposited on time. If they aren’t, the IRS can impose the TFRP equal to 100% of the unpaid trust fund taxes. 

This penalty isn’t just assessed against the business. It can be applied personally to individuals who were responsible for collecting, accounting for, and paying over those payroll taxes. This can include: 

• Business owners 

• Corporate officers or directors 

• Shareholders with authority over finances 

• Employees who had control over payroll tax payments 

Even if you declare bankruptcy, or close the company, it doesn’t matter. If the IRS determines you were personally responsible, they can still pursue you personally for the full amount. 

Who Is Considered a “Responsible Person”? 

Since the IRS investigates not just at the business, but any “responsible person” involved in a potential TFRP, it’s important to understand what makes someone a “responsible person” in the eyes of the IRS. 

Before the IRS can hold you personally responsible for unpaid payroll taxes, they must prove two key things: 

1. Responsibility: Did you have real power over financial decisions? The IRS looks at who in the company: 

• Signs company checks 

• Manages payroll 

• Makes key financial priorities 

• Has the authority to decide which bills get paid 

1. Willfulness: Did you know (or should you have known) that payroll taxes weren’t being paid? And did you choose to do nothing about it? 

If the IRS can prove both responsibility and willfulness, they can assess the penalty — meaning they can officially declare you personally responsible for the unpaid taxes. 

The Impact of the 100% Penalty 

If the IRS deems you liable, the penalty amount can equal up to 100% of the unpaid trust fund taxes, and as we’ve mentioned, they will go after your personal finances if they must. 

When the IRS decides to collect, they have powerful tools to do so, which can include: 

• Freezing your bank accounts 

• Garnishing your wages 

• Placing liens on your property 

• Seizing both business and personal assets 

The Trust Fund Recovery Penalty is, without a doubt, one of the most serious tax challenges a business owner can face, which is why understanding and preventing it is so important to protect your financial future. 

Why Professional Representation Matters 

Dealing with a Trust Fund Recovery Penalty isn’t like handling a routine tax issue. This is serious territory where one wrong move can have major implications, which is why it’s highly recommended to work with a professional if you’re faced with a TFRP. 

At PaulHood, we specialize in turning nightmares like a TFRP into manageable situations. Our tax resolution professionals work with clients to: 

• Review your case to determine whether the IRS has correctly identified you as a “responsible person.” 

• Challenge IRS findings when responsibility or willfulness is unclear or unproven. 

• Explore every possible avenue for penalty relief or creating a payment plan that doesn’t greatly jeopardize your financial future 

• Help you build compliance systems to prevent these tax issues from ever happening again 

We understand both the complexity and the urgency of these cases, and we know how to advocate for you when the IRS is pushing hard. 

Protect Yourself Against the Trust Fund Recovery Penalty 

If you’ve received notice of a potential Trust Fund Recovery Penalty, time is not on your side. Acting quickly gives you the best chance to protect yourself and your business. 

Contact PaulHood today for a free consultation. Our experienced tax resolution team can review your situation, explain your options, and help you move forward with confidence. 

You don’t have to face this alone. One conversation could make the difference between financial survival and total devastation.