6672 Trust Fund Penalty and EFTPS

The issue of what is Trust Fund and what is not Trust Fund can be a problem because of EFTPS.

EFTPS is the Electronic Federal Tax Payment System and was put in places some 15 years ago, gradually all businesses have become required to make all Federal tax payments using it.

The Regulations say that officers and responsible persons are personally liable for "Trust Fund" taxes, but in reality, it's not possible to pay the trust fund portion of the tax first.

First, the Trust fund portion of payroll taxes is generally levied to an officer, or an individual who is determined to be the responsible person.    If the business is still operational, then, presumably, the business is still paying wages, as well as the payroll taxes on those wages.

Second, The IRS allows payments for unpaid payroll taxes to be applied as the taxpayer desires.   Thus if the company is heading for financial failure, the person responsible for making the payroll taxes may wish to designate how the payments are to be made.

The IRS has longstanding policy that allows it to apply non-designated 6672 payments in manner it saw fit.  Fit means that the payments are first applied towards Non-6672 penalties, then to the 6672 penalties.  Thus even as the penalty in total is being paid down, the Trust Fund portion does not get paid down.  It is only after the non-trust fund portion of the tax is paid that the trust fund portion gets paid.

The only way to know this, is to check the balance periodically and check the officers' balance and compare the results.

If the business is still in operation, and is paying the payroll tax liability it is required to use EFTPS

The problem is that EFTPS does not allow payments to be "designated" for trust fund.

While the business remains in operation, and uses EFTPS, the 6672 portion cannot be designaated, the officer remains on the hook while until the entire tax (and penalty and interest) is paid in full.

There is a method for asking that the IRS remove any liens that the officer may have,  otherwise, this just emphasizes the importance of keeping current on payroll taxes.