The short version
- IRC § 6672 makes an individual liable for 100% of the trust-fund taxes — withheld income tax plus the employee share of FICA. The employer's own share and FUTA are outside it.
- No veil piercing is required. § 6671(b) defines "person" to include an officer or employee under a duty to act, so a correctly run LLC or corporation changes nothing about the exposure.
- "Willful" does not mean dishonest. The IRS position is that no evil intent or bad motive is required, and paying other business expenses instead of the withheld tax is itself willful.
- It survives personal bankruptcy. Trust-fund taxes are priority claims under 11 U.S.C. § 507(a)(8)(C) with no age limit, and § 1328(a)(2) names that subparagraph directly.
When a business runs short, payroll taxes are the tempting thing to skip. The money is already in the account, nobody chases it that week, and the alternative is missing rent. That is the decision the IRS is built to punish personally — through a mechanism most owners have never heard of.
The company you formed is not part of this analysis
Section 7501 provides that tax collected or withheld from another person "shall be held to be a special fund in trust for the United States" — money withheld from an employee's wages was never the employer's to spend. Section 6672 then makes "any person required to collect, truthfully account for, and pay over any tax" who willfully fails to do so liable for a penalty equal to the whole of it. Section 6671(b) supplies the definition that does the damage: "person" includes "an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs".
Congress wrote the individual into the statute. There is no derivative liability to establish, no alter-ego finding to make, no commingling to prove — in Slodov v. United States (1978) the Supreme Court treated § 6672 liability as personal and separate from the corporation's own obligation for the same tax. Each responsible person is exposed to the whole trust-fund amount, though the Internal Revenue Manual is clear the government collects it only once.
Two routes to your own money, and only one of them looks at the company
Veil piercing
- State law, decided by a court
- Requires disregarding the entity
- Reaches any company debt
What both share
- Your personal assets are the target
- The test is who controlled the money
- A tidy LLC does not end the inquiry
IRC § 6672
- Federal statute, assessed by the IRS
- The entity is simply irrelevant
- Reaches only trust-fund taxes
Only the employees' money is in scope
The penalty is often called the 100 percent penalty, which sounds worse than it is until you know what the hundred per cent is of. It is the trust-fund portion and nothing else: unpaid income tax withheld from wages, plus the employee's share of the withheld FICA. It does not reach the taxes the business owes in its own right.
| Component of the payroll liability | Inside § 6672? | Why |
|---|---|---|
| Federal income tax withheld from wages | Yes | Held in trust under § 7501. |
| Employee share of Social Security and Medicare | Yes | Collected from the employee, not imposed on the business. |
| Employer share of FICA | No | A tax on the business. Nothing held in trust. |
| FUTA (federal unemployment tax) | No | Also a direct employer tax. |
| The company's late-deposit penalties | No | The measure is the withheld amount. |
The company's balance and a responsible person's balance are therefore different figures, and a proposed personal assessment matching the company's full account balance is wrong on its face.
Responsible is about authority in fact, not the org chart
The Internal Revenue Manual describes responsibility as "a matter of status, duty, and authority", determined on the facts of each case. What the IRS looks for is the ability to decide which creditors get paid: the indicators it names include authority to sign cheques, hiring and firing, determining financial policy, signing the employment tax returns, controlling disbursements, controlling voting stock and making the federal tax deposits.
Two consequences run in opposite directions. A title is not enough — the Manual warns that holding one which appears to carry authority does not by itself establish responsibility, so a passive LLC member who never touched the bank account has a real argument. And a title is not necessary: a controller or bookkeeper who decided each week which invoices to release can be a responsible person, because the statute reaches an employee under a duty to perform the act. Slodov marks the other edge: liability follows the quarters you were actually there for.
Write down who may authorise payments
A resolution recording who may direct disbursements, and to what limit, is the cheapest evidence there is of where authority actually sat — and the first document a responsibility argument reaches for.
Willful means you paid somebody else
Willfulness here carries none of the moral content the word has in speech, and the misreading is expensive. The IRS states that a responsible person acts willfully if they were, or should have been, aware of the outstanding taxes and either intentionally disregarded the law or were plainly indifferent to its requirements — and that no evil intent or bad motive is required. Recklessness counts alongside deliberate refusal.
So the ordinary triage of a cash crisis is the violation. Paying the landlord, paying the supplier who would otherwise stop shipping, even paying net wages — each prefers another creditor over money held in trust. There is no reasonable-cause exception in the statute, and the circuits are split on whether reasonable cause bears on willfulness at all.
The moment the personal liability is created
There is not enough in the account to cover everything this week. What gets paid?
Rent, suppliers, net wages
The withheld tax stays unpaid while other creditors are preferred. On the IRS position that is willful, whatever the commercial logic.
The federal tax deposit first
The trust fund is intact and § 6672 has nothing to attach to. The unpaid suppliers have ordinary contract claims against the business.
Neither element decides it on its own
Responsibility and willfulness are separate findings
Responsibility
Willfulness
Unaware, and no reason to be aware
Knew or recklessly disregarded
No real control over payments
No penalty
Neither element present.
No penalty
Knowing the tax was unpaid is irrelevant without authority to have paid it.
Directed which creditors were paid
No penalty
Control alone is not enough. Genuinely no knowledge, and no reason to have any — a narrow defence.
Liable for the full trust fund
Both met. The assessment follows.
Letter 1153 is where the outcome is actually decided
Section 6672(b) forbids the penalty being imposed until the IRS has notified the person in writing, at least 60 days before any notice and demand. In practice that notice is Letter 1153, and those 60 days — 75 if it is addressed outside the United States — are the whole of your administrative opportunity. Nothing here goes to the Tax Court.
- 1
Date the letter, not the day you opened it
The period runs from the date Letter 1153 was mailed or delivered. Post arriving at a closed business address has already burned part of it.
- 2
Identify which element is contested
There are three things to dispute: responsibility, willfulness and the amount. A protest explaining why the business failed, without addressing one of those, answers a question nobody asked.
- 3
Ask the revenue officer for the file
Request the Form 4180 interview records the determination rests on, and the computation behind the figure. Check it covers the trust-fund portion only, over quarters you had control.
- 4
Post the protest inside the window
Send it by certified or registered mail. The Manual treats a timely mailed protest as timely under § 6672(b)(3) even where the protest is inadequate, so a brief filing beats a late one.
- 5
Take the Appeals conference
A timely protest holds the assessment and sends the case to an independent Appeals officer, unless collection is in jeopardy. This is the last stage where the penalty can be stopped rather than refunded.
Missing the window is not the end, only the expensive route. The penalty is divisible, so a responsible person need not pay the full assessment to reach a court: pay the tax attributable to one employee for one quarter, file a Form 843 claim for each quarter and sue for refund in a district court or the Court of Federal Claims. Section 6331(i) holds collection of the disputed liability while that suit is pending.
Personal bankruptcy does not clear it
This is the fact that changes people's decisions, and it is rarely stated plainly outside professional practice. The chain is short. Under 11 U.S.C. § 507(a)(8)(C) a tax "required to be collected or withheld and for which the debtor is liable in whatever capacity" is a priority claim — and unlike the income-tax provision at § 507(a)(8)(A), it carries no age limit, so waiting does not convert it into something dischargeable. Section 523(a)(1)(A) excepts taxes of the kind specified in § 507(a)(8) from a chapter 7 discharge. And § 1328(a)(2) excepts debts "of the kind specified in section 507(a)(8)(C)" from a chapter 13 discharge by name, closing the route the older chapter 13 superdischarge once offered.
What this should change about a cash crunch
The practical rule is unglamorous: the federal tax deposit is not a payable to sequence with the others. It is somebody else's money, and every week it sits in the operating account it converts a company problem into a personal one that no entity choice, no operating agreement and no bankruptcy will undo. A business that cannot fund both payroll and the withholding on it can only afford a smaller payroll.
The statute has read this way since 1954, so none of it is a policy shift to watch. What changes is who is standing near the chequebook when the money runs out — worth knowing before you sign on an account for a business you do not control, and worth knowing when a personal guarantee is the only exposure you think you agreed to.
Sources
- 26 U.S.C. § 6672 — failure to collect and pay over tax — Cornell LII
- 26 U.S.C. § 6671(b) — definition of "person" for these penalties — Cornell LII
- 26 U.S.C. § 7501 — liability for taxes withheld or collected
- IRS — Employment taxes and the Trust Fund Recovery Penalty
- IRM 5.7.3 — establishing responsibility and willfulness for the TFRP
- IRM 8.25.1 — TFRP overview and authority (Letter 1153, divisible tax)
- IRM 5.17.7 — liability of third parties for unpaid employment taxes
- Slodov v. United States, 436 U.S. 238 (1978) — Cornell LII
- 11 U.S.C. § 507(a)(8) — priority of tax claims — Cornell LII
- 11 U.S.C. § 523(a)(1) — exceptions to discharge — Cornell LII
- 11 U.S.C. § 1328(a)(2) — exceptions to a chapter 13 discharge — Cornell LII
- National Taxpayer Advocate 2016 Annual Report — TFRP under IRC § 6672
General information, not legal advice. This guide explains how these documents and rules generally work. Law varies by jurisdiction and changes, and none of it is applied to your circumstances here. For anything consequential, consult a licensed attorney where you are.
Frequently asked
Does my LLC protect me from unpaid payroll taxes?
No. IRC § 6672 imposes liability directly on an individual, and § 6671(b) defines "person" to include a member or employee of a partnership or an officer or employee of a corporation who is under a duty to act. Nothing has to be pierced or disregarded for it to apply, so the quality of your formation, funding and record keeping makes no difference to this particular exposure.
How much of the payroll tax bill can the IRS collect from me personally?
The trust-fund portion only: the federal income tax withheld from wages plus the employee share of the withheld Social Security and Medicare tax. The employer's own share of FICA, FUTA and the company's late-deposit penalties are outside the section. Each responsible person is exposed to the full trust-fund amount, though the IRS may collect that amount only once across the business and all responsible persons.
I paid my staff and suppliers instead. Is that willful?
On the IRS position, yes. Willfulness requires that the person was, or should have been, aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to it. No evil intent or bad motive is required, and paying other business expenses instead of the withheld tax is the standard example. Reckless disregard of an obvious risk of non-payment counts as well.
What should I do when Letter 1153 arrives?
Diarise the deadline from the date the letter was mailed or delivered, not the date you read it: you have 60 days, or 75 if it was addressed outside the United States. Decide whether you are contesting responsibility, willfulness or the amount, ask the revenue officer for the interview records and the computation, and post a protest by certified mail inside the window to hold the assessment and reach Appeals.
Can the trust fund recovery penalty be discharged in bankruptcy?
Not through a personal bankruptcy. Withheld taxes are priority claims under 11 U.S.C. § 507(a)(8)(C) with no age limit, § 523(a)(1)(A) excepts taxes of that kind from a chapter 7 discharge, and § 1328(a)(2) names § 507(a)(8)(C) directly as an exception to a chapter 13 discharge. The company filing does not help, because the liability is assessed against the individual rather than the entity.