For many business leaders, tax compliance is seen as a function of back-office operations—critical, but largely compartmentalized. However, few realize that failure to properly remit certain taxes can have very real, very personal consequences, even for individuals who may not be directly involved in day-to-day financial oversight.
The concept of Responsible Person Liability (RPL) is one that more business owners, executives, and even employees should understand. Under both federal and state tax laws, individuals deemed “responsible” for a company’s tax compliance can be held personally liable for unpaid taxes—even if they didn’t personally benefit from the shortfall or were unaware of the issue.
What Is Responsible Person Liability?
Responsible Person Liability refers to the legal mechanism by which tax authorities—federal, state, or local—can collect unpaid trust fund taxes from individuals associated with a business. These trust fund taxes include federal employment taxes (such as income tax withholdings and Social Security taxes) and certain state-level obligations like sales and use taxes or withholding taxes.
The most prominent example at the federal level is 26 U.S. Code § 6672, often referred to as the Trust Fund Recovery Penalty (TFRP). This statute allows the IRS to impose personal liability on anyone who:
- Is responsible for collecting, accounting for, or paying over trust fund taxes, and
- Willfully fails to do so.
This means that if your business fails to remit these taxes, you—not just your company—could end up with a personal tax bill.
Who Can Be Held Liable?
Contrary to popular belief, this liability doesn’t only apply to CEOs or CFOs. Courts have held a wide range of individuals liable under RPL, including:
- Company officers and directors
- Controllers and payroll administrators
- Accountants
- Bookkeepers
- Even outside consultants or board members, in rare cases
What matters most is whether the person had effective control or significant influence over the business’s financial decisions, especially when it comes to tax compliance.
In some cases, even an individual who merely signed checks, authorized payments, or had the authority to make financial decisions could be deemed a “responsible person.” And crucially, willful failure doesn’t necessarily mean malicious intent—it could simply mean knowing the taxes were due and choosing to pay other obligations (like vendors or payroll) instead.
Why This Matters
The penalties can be steep. The IRS and state tax agencies can impose the full amount of unpaid trust fund taxes on any or all responsible persons, meaning the government can choose the most accessible or financially solvent individual to pursue.
In other words, if your company falls behind on tax payments, your personal assets—including savings, homes, and other property—could be at risk.
And unfortunately, this liability cannot be discharged in bankruptcy in many cases, making it especially important to stay ahead of potential issues.
How to Protect Yourself and Your Business
Understanding the risks is the first step. Here are some practical strategies businesses and individuals can adopt to protect against responsible person liability:
- Clarify Roles and Responsibilities
Clearly define who in the organization is responsible for tax filings and payments. Limit the number of individuals with signing authority on company accounts. - Implement Internal Controls
Establish checks and balances for tax-related functions. Ensure multiple layers of review for payroll taxes, sales tax collections, and remittances. - Stay Informed
Even if you’re not the primary financial officer, make sure you receive regular reports about tax compliance. If you’re in a leadership role, you may be held liable simply for ignoring red flags. - Act Quickly on Non-Compliance
If you become aware of a tax issue, address it immediately. Continuing operations while taxes remain unpaid can strengthen the case for willful failure. - Consider Specialized Insurance Coverage
Most general liability or management liability policies do not cover trust fund recovery penalties. Some carriers offer policies or endorsements that can offer protection for responsible person liability—though these may be limited and come with specific exclusions.
Final Thoughts
Responsible Person Liability is one of the more misunderstood and overlooked risks in the world of business taxation. For many entrepreneurs, executives, and even mid-level managers, the idea that a corporate tax misstep could lead to personal financial ruin seems far-fetched—until it happens.
The best defense is a proactive approach: maintain transparency in financial operations, stay current with tax obligations, and consult with tax professionals regularly to ensure your business stays compliant.
Because in the eyes of tax authorities, ignorance isn’t just not bliss—it might cost you everything.
