Payroll Tax Debt & Trust Fund Recovery Penalty: Protecting Small Business Owners
Unpaid 941 payroll taxes are considered stolen trust funds by the IRS. Learn how the Trust Fund Recovery Penalty (TFRP) can reach owners personally.
Katherine M. Johnson, CPA, CTRS
Lead Tax Resolution CPA
Under Internal Revenue Code § 6672, the IRS can assess the Trust Fund Recovery Penalty (TFRP) personally against corporate officers, owners, or check-signers. Corporate LLC shields do NOT protect individuals from personal TFRP liability.
For small business owners, operating cash flow squeezes sometimes lead to using payroll tax withholdings to pay suppliers or rent. The IRS treats unpaid Form 941 payroll taxes far more severely than ordinary income tax debt, classifying unremitted withholding as stolen trust fund money.
# Who Is a 'Responsible Person' Under IRC § 6672?
The IRS evaluates two criteria: 1) Were you a 'responsible person' with authority over business funds? and 2) Did you act 'willfully' by paying other creditors ahead of the IRS?
Responsible persons can include corporate officers, directors, check signers, payroll managers, or majority shareholders.
Frequently Asked Questions (FAQ)
Q: Can payroll tax debt be discharged in personal or business bankruptcy?
No. The trust fund portion of payroll tax liabilities is non-dischargeable in both Chapter 7 and Chapter 13 bankruptcy.
Summary & Next Steps
If your business faces Form 941 payroll tax arrears or a Form 2751 TFRP interview, contact Katherine Johnson, CPA, CTRS immediately.
Katherine M. Johnson, CPA, CTRS
Katherine M. Johnson is a licensed CPA with over 30 years of experience and a Certified Tax Resolution Specialist (CTRS). She personally handles every case — representing individuals and businesses before the IRS and state revenue departments nationwide.
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