Responsible Person and Lender Liability for Trust Fund Taxes — Sections 6672 and 3505 (Portfolio 639)


Juan Vasquez, Jr.


Chamberlain Hrdlicka


Peter Lowy


Nelson Mullins

At a glance

I. Section 6672
II. Section 3505 - Liability of Third Parties Paying or Providing for Wages
III. Comparison of Remedies Under Sections 6672 and 3505
IV. Relationship Between Section 6672 and Section 6663 Fraud Penalty
V. Personal Liability for Unpaid Diesel, Gasoline, and Fuel Excise Taxes
VI. Criminal Sanctions for Failure to Pay Withholding Taxes


Bloomberg Tax Portfolio, Responsible Person and Lender Liability for Trust Fund Taxes — §§6672 and 3505, No. 639, discusses in detail the liability of responsible persons under §6672 and of lenders and others who provide funds under §3505 where there is a failure of an employer to remit trust fund taxes to the government.

Section 6672, often referred to as the “100% penalty” or the trust fund recovery penalty, subjects those persons considered responsible for the collection and payment of withholding taxes to personal liability where the employer fails to pay over such taxes to the government. Although technically a penalty provision, §6672 is used solely as a device to collect the amount of unpaid taxes, not as a means of imposing an additional penalty over and above such amount. Liability attaches under §6672 only when the individual is classified as a “responsible person” and the actions are considered “willful.”

Section 3505 subjects two main categories of persons to liability. First, §3505(a) applies to those who pay wages directly to employees of another employer, or to an agent on behalf of such employees. Liability in this case is the total amount of the unpaid taxes. Second, §3505(b) is directed at those lenders, sureties, or others who specifically finance payrolls, although not paying employees directly. Liability is not imposed upon these persons under §3505(b) unless they provide funds specifically for payrolls and have actual notice or knowledge that the employer does not intend to or will not be able to make timely payment of the withholding taxes. Liability under §3505(b) is limited to 25% of the financing provided for net payroll.

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