The “trust fund recovery penalty” (TFRP) is one of the most onerous tax provisions on the books. Essentially, a business owner may be held personally for unpaid payroll taxes due to a willful failure. In a new case, Amodio, TC Memo 2026-96, 9/28/26, the Tax Court upheld the penalty even though the taxpayer had to pay other obligations to keep the business afloat. But the taxpayer is still entitled to some tax relief.
Background: If payroll taxes aren’t remitted to the IRS in time, the “responsible party”—usually a company officer or treasurer—may be held personally liable for 100% of the unpaid tax liability if they willfully fail to collect or remit the taxes on time. Thus, this tax law provision is often referred to as the “100% penalty.”
The courts have traditionally adopted a broad interpretation of what constitutes a “willful failure” for these purposes. It doesn’t have to be intentional. For instance, the TFRP may be applied in situations where you knew, or should have known, about the taxes that should have been paid, but weren’t actually paid, despite your best intentions.
Facts of the new case: The taxpayer, a resident of New York, provided specialized construction services with unionized workers from the New York and New Jersey metropolitan areas. In addition, the company was contractually obligated to pay various employee union fringe benefits.
During 2015 and 2016, the company experienced severe financial strain stemming from a slow-paying major client coupled with union demands. As a result, the company failed to make timely payments of its payroll tax obligations. The decision to withhold payment was made by the office manager and a third-party payroll processing firm without the taxpayer’s knowledge.
However, when the taxpayer discovered the payroll tax deficiencies, he directed available corporate revenue toward paying employee net wages, union benefit contributions and key suppliers so the business could continue to operate. He reasoned that failing to satisfy employee wage and union benefit obligations would prompt trade unions to pull their workers from active job sites, thereby terminating ongoing projects and destroying the company’s viability.
Finally, in 2020 the company entered into an Offer-in-Compromise (OIC) with the IRS, settling its debt. Under the OIC, the payroll tax obligations for multiple tax periods, including the two tax years in question, were satisfied.
The Tax Court was sympathetic to the taxpayer’s plight. It acknowledged that “real world” economic pressures faced by business owners are difficult to resolve. Nevertheless, it rejected the taxpayer’s argument that he was meeting corporate necessities by paying wages and complying with union requirements. His decision to pay these parties instead of the IRS constituted a willful failure to remit payroll taxes, resulting in the TFRP. Saving grace: The amount of the penalty relating to the two tax years in question is capped by the OIC agreed to by the IRS.
Moral of the story: In trying times, business owners may be forced to borrow from Peter to pay Paul. As far as the IRS is concerned, it must be paid before either Peter or Paul see a dime.
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