Key Takeaways
- TFRP: 100% penalty under IRC §6672.
- Trust fund taxes: employee share FICA + withheld income tax.
- NOT trust fund: employer FICA, FUTA.
- Responsible Person: authority to direct payments.
- Willfulness: paid other creditors knowing taxes owed.
- Form 4180: IRS responsible person interview.
Last updated: January 2026
Trust Fund Recovery Penalty
Why This Matters for the Exam
The TFRP pierces the corporate veil. Know what is "trust fund" and who is "responsible."
Expect at least 2-3 questions on TFRP.
What Are Trust Fund Taxes?
| Trust Fund (TFRP Applies) | NOT Trust Fund |
|---|---|
| Withheld federal income tax | Employer FICA match |
| Employee Social Security | FUTA |
| Employee Medicare |
The TFRP
| Element | Description |
|---|---|
| Penalty | 100% of unpaid trust fund taxes |
| Code section | IRC §6672 |
| Collection | Personal assets (liens, levies) |
| Purpose | Pierce corporate protection |
Who Is a Responsible Person?
| Factor | Description |
|---|---|
| Authority | Can direct which creditors are paid |
| Not title-based | Can be officer, director, bookkeeper |
| Multiple persons | IRS can assess multiple people |
Willfulness Standard
| Test | Description |
|---|---|
| Definition | Paid other creditors while knowing taxes owed |
| Not required | Intent to defraud |
| Common example | Paid rent instead of IRS deposit |
Form 4180 Interview
| Element | Description |
|---|---|
| Purpose | IRS determines responsible person |
| Questions | Who signed checks? Who decided payments? |
| Outcome | Proposed assessment |
Letter 1153 (Proposed Assessment)
| Element | Description |
|---|---|
| Response time | 60 days to appeal |
| If no response | Assessment becomes final |
| Collection | Liens, levies on personal assets |
Real-World Scenario
Scenario: Corporate treasurer pays rent and electricity instead of payroll deposit when short on cash.
- Responsible Person: Yes (authority to direct payments).
- Willfulness: Yes (paid others knowing taxes owed).
- TFRP: 100% of trust fund portion assessed personally.
On the Exam
Expect 2-3 questions on TFRP, typically:
- Trust Fund Questions: "Which taxes are trust fund?"
- Responsible Person Questions: "Can board member be responsible?"
- Willfulness Questions: "What satisfies willfulness?"
The key is to remember: Trust fund = employee share only. 100% penalty. Responsible = authority to pay. Willful = paid others first.
Test Your Knowledge
Treasurer pays rent instead of payroll deposit, knowing taxes owed. Which TFRP element?
A
B
C
D
Test Your Knowledge
Which unpaid payroll taxes subject to TFRP?
A
B
C
D
Test Your Knowledge
Can unpaid board member be TFRP "Responsible Person"?
A
B
C
D