The Trust Fund Recovery Penalty (TFRP) is a 100% penalty assessed under IRC Section 6672 against individuals who are "responsible persons" who "willfully" failed to collect, account for, and pay over federal employment taxes (payroll taxes) withheld from employees' wages.
Why "trust fund"? Payroll taxes withheld from employees (income tax, Social Security, Medicare) are held "in trust" for the U.S. government. They are not the employer's money — they belong to the government.
Two requirements for TFRP: 1. Responsible person: Someone who had the duty and authority to collect and pay the taxes — includes officers, directors, partners, shareholders, or employees with significant control over the company's finances. 2. Willfulness: The responsible person knew about the unpaid taxes AND chose to pay other creditors instead, or recklessly disregarded a known risk of non-payment.
Who can be assessed: - CEO, CFO, comptroller, bookkeeper (if they have authority to sign checks and pay creditors). - Outside payroll service providers who fail to remit. - Shareholders or investors who control company finances.
The penalty: - Equal to 100% of the unpaid trust fund taxes (the employee portion only — not the employer's matching portion). - Can be assessed against multiple responsible persons simultaneously (each is liable for the full amount, but total collected cannot exceed the underlying tax).
Defense: Lack of willfulness (e.g., relied on others to make payments and was deceived).
> Exam tip: TFRP = 100% penalty on responsible persons for unpaid payroll taxes. Both elements must be proven: responsible person AND willfulness. The penalty covers only the employee-withheld portion. Key EA Part 2 and Part 3 topic.