When a business withholds income tax and the employee share of Social Security and Medicare from wages, that money is held in trust for the government. If it is not paid over, the IRS may assess the trust fund portion personally against any individual who was responsible for paying it and who willfully failed to do so.
The penalty equals the full trust fund amount. It is not a percentage on top — it is the withheld money itself, collected from a person instead of a company.
The two elements
Responsible person
Someone with the duty and authority to direct payment. It turns on function rather than title: signing checks, hiring and firing, deciding which creditors get paid, controlling the bank accounts. Bookkeepers, officers without real authority, and passive owners are sometimes swept in wrongly.
Willfulness
Not evil intent. It means knowing the taxes were unpaid and choosing to pay other creditors instead — including payroll, suppliers, or rent. Reckless disregard also qualifies. This is the element most people misunderstand, because paying employees to keep the business alive is exactly the conduct it captures.
More than one person can be assessed. The IRS may assert the penalty against several individuals for the same liability, though it collects the amount only once. Being one of several does not reduce your exposure.
The interview, and why it matters
The IRS develops these cases through a structured interview about who controlled the money. The answers become the record on which the assessment rests, and they are frequently given without advice, in a conversational setting, by someone who does not realize the questions are the case. If an interview has been requested, that is the moment to take advice rather than after.
The sixty-day protest
Before assessing, the IRS issues a letter proposing the penalty. That letter carries a sixty-day period to file a written protest and take the matter to Appeals. It is the best opportunity to contest responsibility or willfulness, because it comes before the liability exists rather than after. Once assessed, the routes are narrower and collection begins.
Defenses that actually work
- You lacked authority over which creditors were paid, whatever your title suggested
- Someone else controlled the accounts and you were excluded from those decisions
- You did not know the deposits were unmade, and could not reasonably have known
- Funds were encumbered such that you were not free to direct them to the IRS
- The amount asserted is wrong — the trust fund portion has been miscalculated, or payments were misapplied between periods
What to do now
Establish which quarters are involved and what the trust fund portion actually is, as distinct from the total payroll liability including the employer share and penalties. Then map who genuinely controlled disbursements during those quarters, with documents rather than recollection.
Been asked to attend an interview?
The interview shapes the assessment. Send the letter and the quarters involved before you attend. No charge for the first conversation.
If your notice has a date on it, start now.
Send a general description of your situation. Please do not include Social Security numbers, account numbers, or documents in a first message.