13.5 Trust Fund Recovery Penalty
Key Takeaways
- TFRP: 100% penalty under IRC §6672 on responsible persons who willfully fail to pay over withheld trust-fund taxes.
- Trust fund taxes: withheld federal income tax + employee FICA (SS + Medicare).
- NOT trust fund: employer's matching FICA and FUTA.
- Responsible person: anyone with authority to direct which creditors are paid — not based on title.
- Willfulness: paying other creditors while knowing trust-fund taxes are due (no fraudulent intent required).
- Form 4180: IRS responsible-person interview; Letter 1153 = proposed assessment (60 days to appeal).
- Personal liability — IRS can levy personal assets of each responsible person.
Why This Matters for the Exam
The TFRP pierces the corporate veil. Know what is "trust fund," who is "responsible," and what makes the failure "willful." The TFRP framework was not changed by OBBBA.
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's matching FICA |
| Employee Social Security (6.2% on wages up to $176,100 in 2025) | FUTA |
| Employee Medicare (1.45% + 0.9% additional if applicable) |
The trust fund concept covers the amounts the employer collects from the employee and holds in trust for the United States — not the employer's own share.
The TFRP
| Element | Description |
|---|---|
| Penalty | 100% of unpaid trust fund taxes |
| Code section | IRC §6672 |
| Collection | Personal assets (liens, levies) — not dischargeable in bankruptcy |
| Purpose | Pierce corporate protection for trust-fund amounts |
Who Is a Responsible Person?
| Factor | Description |
|---|---|
| Authority | Has authority to direct which creditors are paid |
| Not title-based | Can be officer, director, controller, bookkeeper, accountant, or third-party payroll provider |
| Multiple persons | IRS can assess the full 100% against multiple people (joint and several) |
Willfulness Standard
| Test | Description |
|---|---|
| Definition | Paid other creditors while knowing trust-fund taxes were due |
| Not required | Intent to defraud or evil motive |
| Common example | Paid rent, vendors, or payroll net wages instead of remitting the deposit |
Form 4180 Interview
| Element | Description |
|---|---|
| Purpose | IRS determines who is a responsible person |
| Questions | Who signed checks? Who decided which bills to pay? Who hired/fired? Who had bank-account authority? |
| Outcome | Proposed assessment via Letter 1153 |
Letter 1153 (Proposed Assessment)
| Element | Description |
|---|---|
| Response time | 60 days to file a written protest with IRS Appeals |
| If no response | Assessment becomes final and is recorded against the individual |
| Collection | Federal tax liens, wage levies, bank levies on personal assets |
Real-World Scenario (2025)
Scenario: A corporate treasurer, short on cash, pays rent and electricity in Q3 2025 instead of remitting the quarterly payroll deposit. The unpaid trust-fund portion is $48,000.
- Responsible Person: Yes — authority to direct payments.
- Willfulness: Yes — paid other creditors knowing trust-fund taxes were owed.
- TFRP: $48,000 (100% of trust-fund portion) assessed personally on the treasurer.
On the Exam
Expect 2-3 questions on TFRP, typically:
- Trust Fund Questions: "Which taxes are trust fund?"
- Responsible Person Questions: "Can a board member be a responsible person?"
- Willfulness Questions: "What satisfies the willfulness standard?"
The key is to remember: Trust fund = employee share + withheld income tax only. 100% penalty. Responsible = authority to direct payments. Willful = paid others first knowing taxes were due.
Treasurer pays rent instead of payroll deposit, knowing taxes owed. Which TFRP element?
Which unpaid payroll taxes subject to TFRP?
Can unpaid board member be TFRP "Responsible Person"?