Employees Can Be Personally Responsible For a Company’s Failure to Remit Payroll Tax

(An overview of the §6672(a) Trust Fund Recovery Penalty)

The Internal Revenue Code §6672(a) Trust Fund Recovery Penalty (“TFRP”) is among the most formidable tools in the IRS utility belt, and any party overseeing withheld payroll taxes for his or her employer should be aware of it, and the unusual danger it poses. It is very unlike other IRS penalties. Generally the IRS penalizes the taxpayer in cases of noncompliance (and that taxpayer often is an entity or employer), but §6672(a) penalizes the taxpayer’s employee who caused or allowed the mishap.

It is not uncommon for executives to be faced sometimes with tough decisions regarding which debts will be paid when there are insufficient funds to pay them all. In most cases their choices to prioritize one creditor over another will not come back to haunt the employee, because any successful legal action will be directed at the entity/employer. (In fact, this “corporate shield” is one reason businesses are formed as entities; doing so protects owners and employees from risk of legal action resulting from their capacities working for those entities.) The TFRP, though, is assessed directly against one or more individual decision-makers within a company, whether or not the employee believes he or she is indemnified by the company, and even if acting under the direction of a supervisor.

What causes the penalty? How does it work?

The TFRP arises when an employer withholds federal income tax, Social Security tax, or Medicare tax from an employee’s wages, and then fails to turn those amounts over to the IRS. In that case, anyone determined by the IRS to be a “responsible person” can be held personally responsible for the penalty. The amount of the penalty is equal to the amount of money that should have been remitted to the IRS on behalf of employees, but was not. The penalty cannot be discharged in bankruptcy, and is not absolved by payment of the original liability. Let’s examine these characteristics below.

Failure to pay withheld amounts

Money withheld from an employee’s wages, at least initially, belonged to that employee. The employer is deemed to hold those employee funds “in trust” prior to turning them over to the IRS. This consists of federal income tax, and the employee’s share of Social Security and Medicare tax. The employer is required to “match” the Social Security and Medicare tax with equal amounts from its own funds, and while failure to turn over the employer’s match creates problems of its own, that is not part of the TFRP.

Observation: The IRS considers failure to turn over withheld taxes as stealing – not only from the IRS, but from the innocent employee. The employer merely withholds and deposits these amounts as a matter of administrative convenience (as required), but it remains a transaction between the employee and the IRS – one that was derailed by the employer. An employee taken advantage of in this manner will be credited with the proper withholdings, even if never deposited.

Note that actual withholding is not required for the penalty to apply; in fact, withholding is often absent. For instance, an employer may have only enough cash on hand to pay an employee’s net wages (the “take-home pay”). It may not have enough on hand to also pay the employment taxes that make up much of the difference between the employee’s take-home pay and gross pay. If the employer fails to deposit the employment taxes, the TFRP will apply to the amounts that should have been withheld and remitted, regardless of whether any “withholding” truly occurred.

Responsible person

§6671 of the Internal Revenue Code defines a “responsible person” as an “officer, employee, or member” who is “under duty” to ensure the payments are made. The IRS and the courts have interpreted this very broadly to generally include anyone who had a hand in making the choice to forgo paying the IRS, or that had control over the funds and allowed the shortfall to exist. This could apply to a CFO, controller, payroll administrator, or others. Delegating the responsibility to others will rarely remove the mantle of responsibility. It is common for the TFRP to be assessed against multiple parties, each one with some level of control over the decision, either by directing the decision to forgo paying the IRS or acquiescing to it. In that case, they are each jointly and personally responsible for the entire amount of the penalty.

Once the IRS believes the TFRP should apply, a lengthy process, including interviews, is often undertaken before the penalty is assessed. As is the case with most other IRS determinations, its decision creates a rebuttable assumption that the IRS is correct. Unlike nearly any other area of U.S. law, this places the burden of proof onto the accused, rather than the accuser. If neither side can prove its case, the IRS wins. (When dealing with the IRS, you are deemed by the courts to be guilty until proven innocent, rather than the other way around.)

Penalty vs. tax due

The penalty equals the amount of unpaid federal payroll tax (other than the employer’s “match”), but the tax and the penalty are two separate liabilities. The employer owes the withholding taxes until paid, and the responsible person owes a new, additional penalty that is based on those taxes. The employer’s remittance of the taxes does not relieve the responsible person’s penalty, or vice versa.


Controllers, CFOs, payroll accountants, and others who control the cash withheld from employee wages have a significant responsibility as trustees to ensure that money due from the employees to the government successfully completes its journey. A person responsible for that deposit who is in the unfortunate position of triaging limited funds may be tempted to pay employees, vendors, or other creditors first, and allow the IRS to take a back seat. The Trust Fund Recovery Penalty exists to make sure the IRS is paid first, or those who choose otherwise will pay dearly and, unlike other penalties, personally.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

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