The consequences of willful failure to pay payroll taxes

The penalties for failing to pay over trust fund taxes can be severe and sometimes include prison time.

An employer is required to withhold federal income and payroll taxes from its employees’ wages and pay them to the IRS. Withheld payroll taxes are called trust fund taxes because the employer holds the employees’ money (federal income taxes and the employee portion of Federal Insurance Contributions Act (FICA) taxes) in trust until a federal tax deposit of that amount is made (Slodov, 436 U.S. 238 (1978)).

Sec. 6672(a) provides that “any person required to collect, truthfully account for, and pay over any tax imposed by” the Internal Revenue Code who willfully fails to do so, will, “in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax … not collected … and paid over.” The term “any person” is important because Sec. 6672(a) allows the IRS to pierce the corporate veil and proceed against any person who is responsible for the corporation’s failure to pay over trust fund taxes, thereby making that person personally liable for the employer’s unpaid payroll taxes (White, 372 F.2d 513 (Ct. Cl. 1967)). Therefore, the penalty can be imposed on any responsible person, regardless of the form of business entity.

Both the responsible person and the willful failure tests have to be met for the trust fund recovery penalty to apply. Once the penalty is assessed, the person held responsible for the failure has the burden of disproving both those elements.


Both the IRS and the courts broadly define a “responsible person.” The key element in determining responsible person status is whether a “person has the statutorily imposed duty to make the tax payments” (O’Connor, 956 F.2d 48 (4th Cir. 1992)).

Several factors indicate responsibility, including whether the person (1) has power to compel or prohibit the allocation of funds (Godfrey, 748 F.2d 1568 (Fed. Cir. 1984)); (2) has the authority to sign checks; (3) has the authority to make decisions as to disbursement of funds and payment of creditors; (4) is an officer or director of the corporation; (5) has control over the company’s payroll; (6) prepares and signs payroll tax returns; (7) actively participates in day-to-day management; or (8) hires and fires employees (Barnett, 988 F.2d 1449 (5th Cir. 1993)). Although the above list is not exhaustive, the status, duty, and authority of an employee principally determine whether the person is responsible under Sec. 6672 for paying over withholding taxes to the United States (Mazo, 591 F.2d 1151 (5th Cir. 1979)).

However, in IRS Policy Statement 5-14 (Internal Revenue Manual §, the IRS stated that individuals who are nonowner employees performing ministerial acts without exercising independent judgment will not be deemed responsible.

Often, company officers do not want to be bothered with accounting or tax matters. It is not uncommon for a director or chairman to instruct an employee to take care of paying payroll taxes. If that employee fails to pay payroll taxes, the officer should be worried. Delegation of authority does not relieve a person of responsibility to collect and pay taxes to the IRS. Courts have consistently held that the authority that permits control carries with it a nondelegable duty to ensure that withholding taxes are duly collected and paid over to the government (Purcell, 1 F.3d 932 (9th Cir. 1993)).

The trust fund recovery penalty can also be assessed against a corporate officer who fails to pay over withheld taxes at the direction of a supervisor when sufficient funds are available. Sometimes an officer who is aware of the delinquent taxes does not pay out of fear of getting fired for disregarding instructions not to pay. The threat of being fired by a supervisor for paying the taxes will not make the person less responsible for paying the amounts owed (Howard, 711 F.2d 729, 734 (5th Cir. 1983)). Courts have held that an officer is not entitled to prefer his own interest in continued employment over that of the government (Brounstein, 979 F.2d 952, 956 (3d Cir. 1992)). 

A former president of a corporation can also be considered a responsible person under Sec. 6672 if he or she continues to retain authority to sign checks and negotiate with the IRS, holds an office or owns stock in the corporation, manages the day-to-day operations of the business, makes decisions as to disbursement of funds and payment of creditors, and has check-signing authority (Turnbull, 929 F.2d 173 (5th Cir. 1991)). CPAs who handle payroll and bookkeeping for their clients also need to be aware that some CPAs have been held personally liable for clients’ unpaid payroll taxes and have had the 100% trust fund penalty assessed against them (Erwin, No. 1:06CV59 (M.D.N.C. 2/5/13)). 


For purposes of Sec. 6672, a failure to remit trust fund taxes is willful if it is a voluntary, conscious, and intentional, as opposed to an accidental, act. Courts have held that willfulness is present if a taxpayer knew of the nonpayment or recklessly disregarded whether the payments were being made. This can be established by showing that the responsible person failed to assess and remedy the payroll tax deficiencies immediately upon learning of their existence, directed the corporation to pay other creditors (thereby preferring other creditors over the IRS), or neglected his or her duty to use all current and future unencumbered funds available to the corporation to pay those back taxes (Erwin, No. 1:06CV59 (M.D.N.C. 2/5/13)).


It is important for taxpayers to understand that the IRS is aggressive in assessing the trust fund penalty. Payroll taxes are the government’s money, and when the taxes are not paid, the government believes those who have not paid are taking its money. The government does not take this lightly and will not relent in its efforts to collect the amounts it is owed. For a business with numerous employees, unpaid trust fund taxes add up quickly, and the trust fund penalty consequently assessed against a responsible person can be huge. In addition, the penalty is not dischargeable in bankruptcy.

Even worse, failing to pay trust fund taxes can lead to criminal charges. Under Sec. 7202, a willful failure to pay over or collect tax is a felony punishable by up to a $10,000 fine or five years in prison, or both. However, the IRS reserves criminal charges for the most egregious cases, usually where the responsible person owned the business and diverted the money for his or her own personal use, rather than situations where an owner or other responsible person in a business that was facing hard times used the money to pay other creditors in a misguided attempt to keep the business afloat. As the cases discussed below show, in a successful criminal trust fund prosecution, the responsible person is usually sentenced to prison time and required to pay restitution.


A person who is a responsible person under Sec. 6672 can be criminally liable under Sec. 7202. Thus, Sec. 7202 can apply to corporate officers, partnership members, employees, and others responsible for collecting and paying over of withholding taxes. As noted above, however, the IRS generally targets business owners who have used funds for their own benefit that they should have used to pay employment taxes.

Courts have held that Sec. 7202 creates three obligations the person must meet. The person must (1) collect, (2) account for, and (3) pay over the trust fund taxes. If the person does not do all three of these things, he or she has violated Sec. 7202. Defendants have argued that the last two elements should be considered one element and that a person who has collected the tax must both not account for and not pay over the taxes to be guilty. However, the courts have found that the plain language of the statute does not support this interpretation.

Under Sec. 7202, willful means a voluntary, intentional violation of a known legal duty. The IRS does not have to prove that the person had bad faith or a bad purpose. In addition, the financial circumstances of the person or the company he or she is acting for are not taken into account in determining whether the failure to pay the tax was willful.


The following examples of recent criminal employment tax investigations show the trouble taxpayers can get into if they fail to properly withhold and pay over employment taxes. 

Maryland Business Owner: 24 Months in Prison
In January 2013, Alphonso Tillman was sentenced to 24 months in prison and three years of supervised release for failing to account for and pay over employment taxes. Tillman was also ordered to pay restitution of $2,205,991. According to his plea agreement, Tillman was the president and sole owner of two companies that provided security guards to protect commercial and residential properties. Both companies withheld taxes from their employees’ paychecks, but Tillman failed to file the required forms or pay the payroll taxes due, with the exception of payments from IRS collection efforts. The total amount of taxes lost from Tillman’s failure to pay these taxes was $2,205,991.

Tillman spent hundreds of thousands of dollars from the business bank accounts to cover his personal expenses between 2005 and 2008. “Using money withheld from your employees’ compensation for personal gain is reckless,” said Sheila Olander, acting special agent in charge, IRS Criminal Investigation, Washington Field Office. “Business owners are responsible to withhold and pay over income taxes from their employees’ compensation to the IRS. [This sentence] shows failing to do so is a serious offense to which Mr. Tillman is being held accountable” (U.S. Attorney’s Office, District of Maryland, Press Release, March 26, 2013).

Colorado Business Co-Owner: 28 Months in Prison
In September, Beth Ann Pettyjohn, of Englewood, Colo., was sentenced to 28 months in prison and three years of supervised release, and was ordered to pay $4,669,532 in restitution to the IRS, as well as a $25,000 fine. According to court documents, Pettyjohn, the co-owner and vice president of Overhead Door Co. of Denver, stopped paying over the payroll taxes withheld from employee wages, as well as the employer’s matching portion of FICA, totaling almost $4.7 million. Pettyjohn managed the accounting department, determined which bills would be paid, and issued and signed checks. She used the money to buy a number of houses, including paying $285,000 cash to purchase a condominium for her son.

“Employers who fail to remit employment taxes are victimizing legitimate businesses by creating an unfair competitive advantage over those businesses that lawfully pay their share of employment taxes,” said Stephen Boyd, special agent in charge, IRS Criminal Investigation, Denver Field Office. “As this sentence demonstrates, there are real consequences for committing employment tax fraud” (U.S. Attorney’s Office, District of Colorado, Press Release, Sept. 12, 2013).

Nebraska Couple: Husband and Wife Both Get Prison Time
Michael and Laurie Russell, of Hickman, Neb., were sentenced to prison terms (16 months and six months, respectively) for failing to pay over employment taxes. The Russells were also jointly ordered to pay the IRS $311,486 in restitution. According to court documents, the Russells jointly owned and operated a window installation business, for which they withheld employee income and FICA taxes, but paid none of it to the IRS. The couple lived a comfortable lifestyle and could afford to pay the taxes, but apparently chose not to.

“Business owners have a responsibility to withhold income taxes for employees and remit those taxes to the Internal Revenue Service,” said Sybil Smith, special agent in charge of IRS Criminal Investigation. “We are committed to pursuing those who violate the employment tax laws” (U.S. Attorney’s Office, District of Nebraska, Press Release, July 30, 2013).


Although there are options to help a client resolve its trust fund liability, such as an offer in compromise, installment agreement, the IRS appeals process, or litigation, these options can be drawn out, complex, and expensive. It is better to ensure your client avoids the trust fund penalty by filing timely payroll tax returns and paying over payroll taxes. If you know any of your clients have failed to pay payroll taxes, advise them to make every effort to pay the taxes. If your clients face financial difficulties, you should advise them to pay the government before paying creditors. Help your client work with the IRS by making sure the client makes prompt payments of current taxes and makes arrangements to pay back taxes.

Make sure your clients take their duty to collect and pay over trust fund taxes seriously. It is better to be safe than sorry.


People who are “responsible persons” have a duty to collect and pay over payroll taxes and may find that they are liable for the 100% trust fund penalty under Sec. 6672.

Both the courts and the IRS have defined “responsible person” broadly, but the first question is whether the person has a statutorily imposed duty to make the tax payments.

Before the 100% trust fund penalty can be imposed, however, in addition to being a responsible person, that person must also be found to have willfully failed to pay the tax.

The IRS is aggressive in collecting these taxes. In a number of cases where taxpayers have behaved egregiously, it has also pursued criminal prosecutions that landed offenders in jail.

Practitioners should be aware if any of their clients have run afoul of these rules and move quickly to help clients fix any problems.

Vani Murthy ( ) is a tax manager at Golbar & Associates in Los Angeles.

To comment on this article or to suggest an idea for another article, contact Sally P. Schreiber, senior editor, at or 919-402-4828.


JofA article

Tax Practice Corner: CPAs and the Trust Fund Recovery Penalty,” Aug. 2013, page 58


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