Overview: Trust Fund Recovery Penalty

The Internal Revenue Code requires employers to withhold federal income and Social Security taxes from the wages of their employees. An employer is deemed to hold the withheld taxes “in trust” for the United States and must pay them over to the government on a quarterly basis. The withheld amounts are known as trust fund taxes. If an employer withholds the taxes from its employees but fails to remit them, the government must nevertheless credit the employees for having paid the taxes, and seek the unpaid funds from the employer. Under Code Sec. 6672(a) , the IRS may assess a penalty on responsible persons who willfully fail to collect, account for and pay over the taxes to the United States. In order for the United States to assess the penalty under Code Sec. 6672, two requirements must be met: (1) the party assessed must be a “responsible person,” i.e., one required to “collect, truthfully account for and pay over the tax,” and (2) the party assessed must have “willfully refused to pay the tax.” Code Sec. 6672 can lead to extremely harsh results for individuals involved in corporate entities that fail to pay over amounts deemed withheld from the employees. Those involved in the operations of companies suffering from the recessionary economy should be careful in determining which creditors are to be paid and which are not to be paid.