When payroll taxes go unpaid, many business owners assume the problem stays with the company. In Trust Fund Recovery Penalty cases, that assumption can unravel fast.
The Trust Fund Recovery Penalty, often called the TFRP, allows the IRS to pursue certain individuals personally for the trust fund portion of unpaid employment taxes under Internal Revenue Code § 6672. In general terms, that means withheld federal income taxes and employees’ share of Social Security and Medicare taxes can become a personal issue for people the IRS views as both responsible and willful in the nonpayment. The IRS lays out those two core elements in its Internal Revenue Manual, explaining that responsibility turns on “status, duty, and authority,” while willfulness often centers on knowingly paying other creditors after learning payroll taxes are not being paid to the government (IRS IRM 5.7.3).
If you’re new to this area, it may help to start with this broader overview of how TFRP liability works and why responsible-person exposure matters. In this post, you’ll learn about seven common mistakes that can increase personal exposure once a payroll tax problem is already in motion.
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A TFRP case is not just about a delinquent business return. It is an IRS effort to identify real people connected to the company who had enough control over financial decisions to be held personally liable. According to the IRS, more than one person can be responsible, and each responsible person can be assessed for the full unpaid trust fund amount (IRS IRM 5.19.14; IRS Chief Counsel guidance).
That is where exposure often increases. A person may have assumed they were “just helping,” “just signing checks,” or “just filling in temporarily.” But the IRS does not stop at job titles. It looks at practical control: check-signing authority, power over payroll, authority to decide which bills get paid, involvement in tax filings, hiring and firing authority, and the ability to direct business finances (IRS IRM 5.7.3).
One of the most common TFRP mistakes is treating unpaid payroll taxes like ordinary business debt.
For many liabilities, the entity structure matters a lot. For trust fund taxes, the IRS has a separate collection tool aimed at individuals. Section 6672 imposes personal liability on any person required to collect, account for, and pay over the tax who willfully fails to do so (Cornell LII). The IRS describes the TFRP as applying when a business fails to collect or pay trust fund taxes and the unpaid liability is assessed against responsible business individuals (IRS IRM 5.19.14).
Here’s what this often means in practice: even if the company is struggling, dissolved, insolvent, or headed toward bankruptcy, the IRS may still investigate owners, officers, managers, payroll personnel, and other decision-makers individually. Some people in similar situations are surprised to learn that “limited liability” does not automatically end the discussion when withheld payroll taxes are involved.
Another exposure-increasing mistake is relying too heavily on formal titles.
People sometimes assume the opposite things for the same reason:
The IRS approach is more fact-specific than either of those assumptions. Its own manual states that responsibility is a matter of status, duty, and authority, and that a person can have significant control even without final word over every financial decision (IRS IRM 5.7.3). The same manual also notes that a non-owner employee who performs purely ministerial acts under someone else’s control will generally not be treated as responsible. On the other hand, a non-owner with meaningful financial decision-making power still may face exposure (IRS IRM 5.7.3).
That distinction can be critical. A title may hurt, help, or mean very little depending on the surrounding facts. If your situation turns on control issues, it may help to read more about how people evaluate whether they may count as a responsible person.