Trust Fund Recovery Penalty: What is it?

The Trust Fund Recovery Penalty (TFRP) is a penalty that every director, officer, manager or member of a business should be concerned about.  In various situations, an employer is required to collect and withhold taxes from an employee such as federal income tax, and the employee’s share of FICA taxes which are withheld from the employee’s wages.  When an employer withholds taxes on behalf of an employee, he does so in trust for the benefit of the United States and acts as a fiduciary.  See IRC § 7501.  Per § 6672, any person that is required to withhold taxes from an employee and pay them over to the United States, and willfully fails to do so, will be assessed with the TFRP.  The TFRP is important because it is assessed against an individual person(s) rather than the business.  A person liable for a TFRP is liable for 100% of the amount of trust funds that should have withheld and/or paid over.  Therefore, if a person should have paid over $25,000.00 on behalf of his employees, then the person will be individually liable for the full $25,000.00 to the IRS (plus other applicable interest and penalties).