Watch out for the 100% penalty
Certain tax violations carry more severe consequences than others. One notable example is failing to pay federal income and employment taxes that have been withheld from employees’ paychecks. In such cases, the IRS can impose the trust fund recovery penalty, often called the 100% penalty, on any responsible individual.
This penalty is termed the “100% penalty” because the total amount of unpaid federal income and payroll taxes can be assessed personally against one or more responsible individuals. It is also called the “Trust Fund Recovery Penalty.”
Determining Responsible Person Status
Since the 100% penalty can only be imposed on a responsible person, who qualifies as one? Responsible persons can include a shareholder, director, officer, or employee of a corporation; a partner or employee of a partnership; or a member (owner) or employee of a limited liability company (LLC). To be subject to this penalty, the individual must:
1. Be responsible for collecting, accounting for, and paying over the withheld federal income and payroll taxes and
2. Willfully fail to pay these taxes. “Willfully” means that the failure to pay was intentional, deliberate, voluntary, and knowledgeable. Simply having the authority to sign checks in the direction of a superior does not automatically establish the status of a responsible person. There must also be an understanding of and control over the business’s financials. Notably, an individual cannot avoid responsible person status merely by delegating signature authority on bank accounts to another person to evade the 100% penalty. In practice, the IRS will first scrutinize individuals who possess check-signing authority.
What courts examine
The courts have considered several factors beyond check-signing authority to determine whether an individual is responsible. These factors include whether the individual:
1. Is an officer or director of the company;
2.Owns shares or has an entrepreneurial stake in the company;
3.Is actively involved in the day-to-day management of the company;
4.Has the authority to hire and fire employees;
5.Makes decisions about which debts or taxes will be paid and in what order;
6.Exercises daily control over bank accounts and disbursement records.
Real-Life Cases
The individuals who the 100% penalty has targeted can often be surprising. Here are three real-life examples:
**Case 1:** The operators of an inn failed to pay withheld taxes. The inn was an asset of an estate, and the executor was found to be a responsible person.
**Case 2:* A member of a charitable organization’s trustees was aware of the organization’s tax delinquency and had the authority to decide whether to pay the taxes. The IRS determined that this volunteer was a responscorporation’s
**Case 3:** A newly hired corporation’s CFO discovered that the company was several years behind in paying withheld federal income and payroll. The company’s CFO notified the company’s CEO about the issue, and they both have the company’s board of directors. Although the company had sufficient funds to cover the taxes, no payments were made. After the CFO and CEO were fired, the IRS imposed a 100% penalty on them for the unpaid withheld taxes accrued during their tenure. A federal appeals court upheld a previous ruling that both officers were considered responsible persons who acted willfully by prioritizing other expenses over the withheld federal taxes. As a result, they were personally liable for the 100% penalty.
Don’t be tagged
If you are involved in running a business identity that has not paid the federal taxes withheld from employee paychecks, make sure the IRS is not designating you as a responsible person. This could lead to a 100% penalty on the unpaid taxes. While you may have the opportunity to prove that you were not responsible, doing so can be costly and complicated.
If you have a question about this, call me at 856-665-2121.
Ron Cappuccio, 4/7/2025
