Understanding the Trust Fund Recovery Penalty (TFRP)
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If you are a business owner or an officer in a company with unpaid payroll taxes, you may have heard the term Trust Fund Recovery Penalty (TFRP). This is one of the most aggressive collection tools used by the IRS. But what exactly is it, and how does it work?
At Ledingham Law, we help business owners navigate these complex tax liabilities. Here is everything you need to know.
How the TFRP Works
When an employer pays a salary to an employee, they withhold income tax, Social Security, and Medicare taxes. These withheld amounts are held in “trust” for the U.S. government until they are paid over to the IRS.
If these taxes are not paid, the IRS views this as theft of government funds. The TFRP allows the IRS to pierce the corporate veil and assess a penalty against individuals within the company equal to 100% of the unpaid trust fund taxes.
Who Is Liable? (The Two-Prong Test)
To assess this penalty, the IRS must prove two things:
Responsibility: The individual had the duty and status to direct the collection, accounting, and payment of trust fund taxes. This often includes owners, officers, directors, or anyone with check-signing authority.
Willfulness: The individual knew the taxes were due and voluntarily chose to pay other creditors (vendors, rent, utility bills) instead of the IRS.
Key Takeaways
Personal Liability: The TFRP makes business tax debt a personal debt.
100% Penalty: The penalty is equal to the unpaid income tax and employee portion of FICA (Social Security/Medicare).
No Corporate Shield: Closing the business or filing corporate bankruptcy does not eliminate this personal liability.
Best Practices to Avoid the TFRP
Prioritize Payroll Taxes: Never borrow from payroll withholdings to pay operating expenses.
Monitor Payroll Services: Even if you use a third-party payroll service, verify that payments are actually being made to the IRS.
FAQs About the Trust Fund Recovery Penalty
- Does the penalty include the employer’s matching portion of taxes?
A: No. The TFRP applies only to the money withheld from employee paychecks (the “trust fund” portion), not the employer’s matching share or penalties/interest on the business account.
Can multiple people be held liable?
A: Yes. The IRS can assess the penalty against every “responsible person,” though they can only collect the total amount due once.
Read more about the Trust Fund Recovery Penalty on IRS.gov.
Facing a TFRP investigation? Contact Ledingham Law today for a consultation.