The Trust Fund Recovery Penalty is a powerful weapon in the IRS’ arsenal. Under Internal Revenue Code section 6672, responsible officers and individuals can become liable for unpaid trust fund taxes. These include most payroll taxes such as income tax withholding, social security and Medicare. That means if a business fails to pay these taxes, the IRS can still seek to collect from those it believes are responsible.
Most states have a similar trust fund recovery provision in their tax codes. Under state law, sales tax may also be considered a trust fund tax for which personal liability may attach.
The specific language in the tax code says, “Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax… shall… be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”
Responsible individuals could include CFO’s, accounts payable managers and corporate officers. The key is whether the person was required to report or pay taxes. If you have signature authority on an account or sign tax returns, be concerned if taxes aren’t getting paid.
To impose the trust fund recovery penalty and hold an individual personally liable, the IRS must prove two things. First, they must prove the person is “responsible” for the taxes and second, that the person acted willfully.
Courts have said that willfulness can be shown if the person had knowledge of the unpaid taxes or had a “reckless disregard of an obvious and known risk that taxes might not be remitted.” In other words, burying your head in the sand is not enough to escape liability.
The trust fund recovery penalty is not limited to one person. Courts have upheld the right of the IRS to assess multiple responsible individuals for the penalty.
In determining who is responsible for a trust fund recovery penalty assessment, the IRS often looks at check signing authority, corporate bylaws, corporate organization charts, job descriptions and even stock ownership records. If you own a controlling share of the business, expect the IRS to come after you if withholding taxes aren’t paid. (In September of 2011, we wrote about a construction company owner who was sentenced to prison for 22 months for not paying trust fund taxes.)
The trust fund recovery penalty can easily be avoided by remembering to always pay withholding, social security and sales taxes first. Although thousands of businesses fail every year, most are able to wipe out their debts through bankruptcy court. That doesn’t work for trust fund taxes, however. If your business is going under, make sure the tax man gets paid first!
Willful failure to pay trust fund taxes is also a crime under federal law and in most states. While bookkeepers and administrative personnel are rarely criminally prosecuted for unpaid taxes, the IRS has been known to assess the trust fund recovery penalty against them. We are even aware of cases in which an outside CPA was assessed.
Not paying trust fund taxes is a high priority with both the IRS and state revenue agencies. Audits and assessments often lead to criminal prosecutions.
If you find yourself falling behind with taxes, receive an audit notice or get that knock on the door by criminal special agents, contact an experienced tax lawyer immediately. The tax attorneys at Mahany & Ertl have decades of experience – we are ready to help! For a confidential consultation, contact attorney Bethany Kroes at (414) 223-0464 or by email at
Mahany & Ertl, LLC – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Minneapolis, Minnesota, Portland, Maine and San Francisco, California. IRS services nationwide.
Post by Brian Mahany, Esq.