What is trust fund recovery penalty

| by Max Soni

Thanks for visiting Spodek Law Group – a second-generation law firm managed by Todd Spodek, with over 40 years of combined experience. If you’re reading this, your business probably failed to pay employee payroll taxes to the IRS, and now the government wants to hold you personally responsible for every dollar. That’s the trust fund recovery penalty. It doesn’t just hit the business – it comes after you, your bank accounts, your house, everything you own. We’ve handled cases that made national headlines, like the Anna Delvey Netflix series and the Ghislaine Maxwell juror misconduct case, many, many cases others said were impossible to win.

The trust fund recovery penalty is how the IRS makes individual business owners pay for unpaid employee withholding taxes – even when the business is broke or closed. Under 26 U.S.C. § 6672, any “responsible person” who willfully fails to pay these taxes faces a penalty equal to 100% of the unpaid amount. The IRS can then seize your personal assets to collect.

You withheld income tax, Social Security, and Medicare from your employees’ paychecks. That money never belonged to your business – it belonged to the government. When you paid rent, suppliers, or kept the lights on instead of sending those withholding taxes to the IRS, you spent the government’s money. Now they want it back, and they’re coming after you personally.

Who the IRS Goes After

The IRS doesn’t just target business owners. They go after anyone who was a “responsible person” – that means anyone who had authority to decide which bills got paid. CFOs, comptrollers, even bookkeepers who signed checks can be held liable. Corporate officers get hit frequently, the IRS investigates who actually controlled company finances when payroll taxes went unpaid.

Courts look at the totality of circumstances. Did you have signature authority on bank accounts? Could you hire and fire employees? Did you decide which creditors got paid each month? If you had “the final word as to what bills should or should not be paid, and when” according to IRS procedures, you’re probably a responsible person. Multiple people can be responsible for the same unpaid taxes – the IRS will assess the full penalty against each of you and collect from whoever has assets.

The “willfulness” element trips people up because it doesn’t mean what you think. You don’t need evil intent or criminal purpose. Willfulness just means you knew the payroll taxes weren’t being paid and you paid other expenses instead. That’s it. Paying employees their net wages when you can’t cover the withholding – that’s willful. Paying vendors to keep the business running – willful. You chose who got paid, the IRS didn’t get paid, that satisfies the willfulness test.

Criminal Prosecution Risk

The trust fund recovery penalty is civil, not criminal. But there’s a separate criminal statute – IRC Section 7202 – that applies to the exact same conduct. Willful failure to collect or pay over employment taxes is a felony punishable by up to five years in federal prison, $10,000 in fines, or both.

The DOJ Tax Division has been prosecuting these cases aggressively in 2024 and 2025. Recent cases include a California CEO sentenced in July 2025 for employment tax crimes, an Oregon business owner who pleaded guilty in June 2025, and a California man sentenced in May 2025 for a 20-year scheme to evade employment taxes. The Justice Department even proposed updating federal sentencing guidelines to remove language calling these prosecutions “infrequent” – because they’re not infrequent anymore.

Richard Whatley of Salt Lake City got 51 months in federal prison for failing to pay withheld payroll taxes over five years. The court ordered $540,000 in restitution. That’s on top of whatever civil penalties the IRS assessed. When prosecutors decide to make an example of someone, the exposure is serious – prison time, criminal record, restitution, and you still owe the taxes.

Most cases stay civil. The IRS doesn’t criminally prosecute every trust fund case, not even close. But if the amount is large, if the conduct went on for years, if you lied to the IRS or tried to hide assets, criminal charges become a real possibility. We’ve seen it happen.

What Happens When the IRS Assesses the Penalty

The IRS will send you a Letter 1153 proposing to assess the trust fund recovery penalty. You have 60 days to appeal – 75 days if you’re outside the United States. That 60-day window is critical. Once the penalty is assessed, the IRS can file federal tax liens against your property, levy your bank accounts, and seize assets. They treat it like any other tax debt you personally owe.

The penalty equals the full amount of unpaid trust fund taxes – every dollar of income tax withholding, Social Security, and Medicare that should have been paid over. Plus interest that accrues from the date the taxes were due. If your company failed to pay $200,000 in employee withholding over two years, you personally owe $200,000 plus interest.

Collection doesn’t stop because the business closed or filed bankruptcy. The penalty attaches to you individually. Your personal bankruptcy might discharge it under certain circumstances, but the IRS will fight that. They’ll argue the debt is non-dischargeable as a trust fund tax or because willfulness makes it a penalty for fraud. Don’t assume bankruptcy fixes this problem.

Defending Against the Penalty

You can challenge whether you were actually a responsible person. If you didn’t have real authority over finances – if someone else made the decisions about which bills got paid – you might not be liable. We’ve seen cases where the IRS goes after people who had titles like “vice president” but no actual control. Proving you weren’t responsible requires documenting who really ran the company’s finances.

The willfulness element can be challenged too. If you genuinely didn’t know the payroll taxes weren’t being paid, if someone else handled tax deposits and lied to you about it, that might defeat willfulness. But ignorance is hard to prove when you’re signing checks and reviewing financial statements. Courts usually find that responsible people should have known about unpaid payroll tax obligations.

Timing matters – before the IRS formally assesses the penalty, you have leverage to negotiate. Once assessment happens, your options narrow dramatically. The IRS can offer installment agreements or partial payment plans, but they’re collecting one way or another. Some cases settle through Offer in Compromise, though the IRS is tougher on trust fund cases than other tax debts because you spent money that belonged to the government.

At Spodek Law Group – we’ve handled federal tax cases for over 40 years, cases involving millions in disputed taxes and criminal exposure. Our attorneys include former federal prosecutors who understand how the government builds these cases. Whether you’re facing a proposed penalty assessment or criminal investigation, we can evaluate your exposure and fight for the best outcome. The trust fund recovery penalty destroys people financially – the IRS will take everything if you don’t have experienced counsel pushing back. Call us 24/7.