A recent decision by the Court of Appeals for the Fourth Circuit reinforces the dangers of failing to pay federal payroll taxes. A company president argued that he was not liable for the trust fund recovery penalty because the business’ creditors were effectively in charge. The court rejected his argument and held him liable for the trust fund recovery penalty (TFRP).

Construction business

The president owned a construction company. The president negotiated contracts, approved hiring, authorized spending, and signed company checks.

In 2003, the company began to experience financial difficulties and fell behind it its federal payroll tax deposits. One of its lenders terminated a $2.5 million line of credit and seized the balance of the account. A surety agreement with another entity effectively allowed that entity to take joint control over the company.  The president, however, continued to perform his duties, including the signing of company checks. The IRS eventually assessed a TFRP against the taxpayer for the unpaid payroll taxes.


The TFRP is an onerous penalty because it is the full amount of the unpaid tax. Consequently, the TFRP can and often does reach very high amounts. The IRS may assess the TFRP against any person who:

  • Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
  • Willfully fails to collect or pay them

Court’s analysis

The Fourth Circuit agreed with the IRS that the company president was a responsible person for purposes of the TFRP. As president, he controlled the company’s payroll because he used his signature authority on bank accounts to pay employees and others.

Additionally, the court found that the company president determined which creditors to pay. The president could have paid the IRS; instead he chose to pay other creditors. The taxpayer intentionally preferred those creditors over the IRS, the court found.

The court also rejected the president’s claim that he lacked authority over the company after the bank seized the balance of the company’s account. A responsible person, the court found, cannot avoid the TFRP by ceding control to a financial institution the right to exercise financial control over the company.

Newbill, CA-4, July 29, 2011