Avoiding the IRS’ 100% Penalty for Unpaid Payroll Taxes

When it comes to taxes, some mistakes carry far more serious consequences than others. One of the most severe is failing to pay over federal income and employment taxes withheld from employees’ wages. In these cases, the IRS may impose what’s known as the Trust Fund Recovery Penalty (TFRP) — also referred to as the "100% penalty" — against individuals it deems responsible.

What Is the 100% Penalty?

The penalty is called “100%” because it holds the responsible party personally liable for the full amount of unpaid federal income and payroll taxes. This penalty can apply to one or multiple individuals the IRS determines had control over tax withholding and payment obligations.

Who Is Considered a “Responsible Person”?

The IRS defines a responsible person as someone who has the duty to collect, account for, and pay over withheld taxes. This could include:

• Corporate officers, directors, or employees

• Partners or employees of a partnership

• Members or employees of an LLC

To be held liable, the person must have willfully failed to pay the taxes. Willfulness is defined as a voluntary, intentional decision to disregard the law, not a simple mistake.

Having check-signing authority alone isn’t enough to establish responsibility. However, if an individual has control over a company’s finances and is aware taxes aren’t being paid, that’s often sufficient for the IRS to act.

What Do the Courts Consider?

Courts use a variety of factors to assess whether someone is a responsible person, such as whether they:

• Held a leadership or ownership role

• Were active in daily business operations

• Controlled payroll and tax payment decisions

• Could hire or fire employees

• Managed bank accounts and disbursements

• Chose which bills or debts to prioritize

Real-Life Examples

Here are a few cases where the IRS successfully applied the 100% penalty:

Case 1: The executor of an estate-operated inn failed to remit withheld taxes. The IRS held the executor personally responsible.

Case 2: A volunteer board member of a nonprofit was aware of unpaid taxes and had the authority to act. Despite being unpaid, the IRS deemed the volunteer a responsible person.

Case 3: A newly hired CFO discovered unpaid taxes and informed leadership, but no payments were made despite available funds. Both the CFO and CEO were later held personally liable for willfully failing to pay.

Take Preventive Action

If you're involved in running a business, especially if you have financial responsibilities — it’s critical to ensure all withheld payroll taxes are paid on time. The IRS can pursue anyone it believes is responsible, and defending yourself after the fact can be both difficult and costly.

To protect yourself:

• Stay informed about your business’s tax obligations

• Keep detailed financial records

• Consult with a tax advisor regularly

• Don’t assume limited authority shields you from liability

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The 100% penalty is harsh, but avoidable. Proactive compliance and clear financial oversight can go a long way in protecting both your business and your personal assets.