Updated November 2026 · VG CPA PC advisors
What the penalty covers
The Trust Fund Recovery Penalty equals 100% of the unpaid trust fund taxes: federal income tax withheld from wages and the employees' share of Social Security and Medicare. It does not include the employer's share of payroll taxes or penalties and interest on the business account.
It can be assessed against any person who was responsible for collecting and paying the taxes and who willfully failed to do so. Willful here means knowing the taxes were unpaid and choosing to pay other creditors, not evil intent.
Who is responsible
Responsibility depends on authority, not title. The IRS looks at who signed checks, controlled bank accounts, decided which bills to pay, signed payroll returns and managed finances. Owners, officers, controllers and sometimes outside bookkeepers or lenders can be found responsible, and several people can be liable at once.
The revenue officer usually conducts an interview using Form 4180. That interview is critical, and having a representative prepare you and attend can change the outcome.
Proposed assessment and appeal
Before assessing, the IRS sends Letter 1153 proposing the penalty. You have 60 days (75 if outside the US) to file a protest with Appeals. After assessment, you can still contest it by paying a divisible portion, one employee's share for one quarter, and filing a refund claim and suit.
The IRS collects the trust fund amount only once, so payments by the business or another responsible person reduce everyone's liability. Designating voluntary business payments to trust fund taxes can protect owners.