What is the IRS Trust Fund Recovery Penalty?

Who is Responsible for the TFRP?

In the most general sense, the person who is responsible for the trust fund recovery penalty is the person whose duty it is to pay withheld taxes to the IRS, and who fails to do so. Exactly who this person is varies from company to company. In some, it is the CEO or CFO. In others, it is the payroll manager, or even a third-party accounting or payroll service that has been hired to manage all payments. 

In some cases, however, the IRS doesn’t stop at just the individual who failed to pay the taxes. They also may charge anyone who knew that the taxes should have been paid, but weren’t. If a CEO is aware that their third-party payroll company isn’t paying taxes, or if an employee becomes aware that the CFO hasn’t paid taxes as required, they may be held accountable as well. 

As with all serious charges, the IRS cannot simply claim that certain individuals are culpable and charge them ad-hoc. They must have evidence that the person was aware and chose not to act. A CEO who is unaware that a third-party company wasn’t paying forward withheld taxes is not culpable. A CEO who instructs a third-party company to hold onto withheld taxes rather than paying them forward is, indeed, culpable. 

Let’s look at an example. Let’s say CEO Jack needs to pay his employee Jill for her last 2 weeks of work. Her gross pay is $500, $100 of which will be withheld for taxes. Jack pays Jill her $400 net pay, but rather than giving the $100 of withheld tax pay to the IRS, he uses it to buy a fancy new desk chair. Jack is now liable to be charged with the Trust Fund Recovery Penalty. 

Now, let’s say CEO Jack told COO Joe that he was going to do such a thing. Joe sees Jack’s fancy new desk chair, and emails him to ask if that was paid for with the IRS’s money. Jack says yes, and Joe does nothing. Joe is now liable to be charged, as well. 

How Much is the Trust Fund Recovery Penalty? 

It’s pretty simple to calculate the Trust Fund Recovery Penalty. The amount you’ll be charged is the exact amount that you failed to pay the IRS. That includes: 

• Withheld income taxes 
• Withheld Social Security contributions 
• Withheld Medicare contributions 

When you get charged with the Trust Fund Recovery Penalty, you’ll still owe the IRS the amount that you failed to pay them, in addition to a penalty charge of the same amount. Essentially, however much you withheld but failed to pay the IRS, you will now owe the IRS double that. 

In the example of Jack and Jill, Jack still owes the IRS the $100 he withheld from Jill’s paycheck, and also owes them an additional $100 in penalty charges. On top of that, Joe owes the IRS $100 in penalty charges, too.