What is a "trust fund tax"
Federal income tax withheld from employees and the employee's share of FICA are "trust fund taxes" — money the employer collects from the employee and holds in trust for the IRS. The employer must remit these amounts to the IRS regardless of the employer's own financial condition.
Section 6672 personal liability
When an employer fails to remit trust fund taxes, the IRS can assess the Trust Fund Recovery Penalty (TFRP) against any "responsible person" who "willfully" failed to ensure payment. The TFRP equals 100% of the unpaid trust fund taxes — and it's imposed personally, bypassing the corporate or LLC veil.
Who is "responsible"
Anyone with the authority to control payment of taxes — typically owners, officers, controllers, sometimes bookkeepers, occasionally outside accountants. Title alone does not control; functional authority does. The TFRP is jointly and severally liable, so the IRS can collect the full amount from any responsible person.
What is "willful"
Conscious choice to pay other creditors before the IRS — even paying employees their net wages while the withheld amounts are unpaid — is willfulness for TFRP purposes. There need not be intent to evade tax; mere preference for another creditor is enough.
Defense and collection
The TFRP is the most aggressively collected tax in the Code. Once assessed, it can be collected like any other tax — federal liens, levies, bank garnishments, wage garnishments, and seizure of personal assets. Always pay employment taxes before any other creditor when cash is short.
Common mistakes worth avoiding
The recurring mistakes filers make on this topic cluster in three patterns: (1) optimizing for current-year tax at the expense of multi-year tax, (2) treating the choice as binary when the IRS framework actually allows nuance (partial elections, hybrid methods, year-by-year reassessments), and (3) deferring the analysis until the return is due rather than running it during the year when the result can still influence behavior. A short annual review — even thirty minutes — catches all three failure modes and replaces vague intuition with documented reasoning.