Why Payroll Taxes Are Different
Payroll taxes are held in trust. When an employer withholds income tax and FICA, those funds belong to the government from the moment of withholding. Failure to remit is treated as misappropriation, not merely late payment. This is why payroll cases get priority attention from revenue officers.
The Trust Fund Recovery Penalty
IRC Section 6672 allows assessment of a 100% penalty against any "responsible person" who "willfully" failed to pay over trust fund taxes. This is a separate personal assessment equal to approximately 70% of the total payroll tax liability (the trust fund portion: withheld income tax plus employee FICA).
Who Is a Responsible Person?
Interpreted broadly: anyone with authority to decide which creditors get paid. Includes officers, directors, shareholders with control, bookkeepers with check-signing authority, and sometimes lenders who exercise financial control. Multiple people can be simultaneously responsible.
The Willfulness Requirement
Does not require evil intent. Only requires a voluntary, conscious choice to pay other creditors instead of the IRS when the person knew or should have known taxes were due. The most common scenario: a cash-strapped business paying suppliers and rent instead of trust fund deposits.
Defenses
Challenge the responsible person designation (figurehead officers, those excluded from financial decisions) or challenge willfulness (unaware of unpaid taxes, relied on subordinate assurances, took immediate corrective action). Early intervention is critical because once assessed, the TFRP follows the individual personally regardless of what happens to the business.
Payroll tax problems are the most dangerous IRS liability a business owner can face. The personal exposure is real, the IRS pursuit is relentless, and early intervention is critical.