Tax Law Center Blog

The Trust Fund Recovery Penalty (TFRP), authorized under Internal Revenue Code (I.R.C.) § 6672, remains one of the IRS’s most potent collection tools, allowing the IRS to hold individuals personally liable for an employer’s failure to remit withheld income and employment taxes. A decision this month from the United States District Court for the Eastern District of Pennsylvania, United States v. Flaim (Nov. 4, 2025), offers a reminder of the expansive reach of this penalty and the remarkably low bar the government must clear to satisfy the “willfulness” requirement.

The case, in which the government was granted Summary Judgment, serves as a crucial primer for tax professionals on the elements of TFRP liability and the absolute priority trust fund taxes hold over virtually all other business expenses.

The Two Pillars of TFRP Liability

For the IRS to successfully assess the TFRP against an individual, it must prove two elements by a preponderance of the evidence:

1. Responsible Person: The individual must have the duty and authority to collect, account for, and pay over the trust fund taxes.
2. Willfulness: The individual must have failed to remit the taxes voluntarily, consciously, and intentionally, as opposed to accidentally.

United States v. Flaim demonstrates how easily the Government can satisfy these two elements when the individual exercises financial authority.

Dissecting the Flaim Decision

The defendant, Kathryn S. Flaim, was assessed the TFRP for unpaid employment taxes totaling over $204,000 owed by two related entities. The court’s analysis on both elements provides clear practice points for taxpayer representation:

1. The “Responsible Person” Element: Control Over the Purse

The court found Ms. Flaim was a responsible person for both entities based on a constellation of duties and status:

• Financial Authority: For one entity, she was described as “assistant administrator” and “business manager” whose responsibilities included determining financial policy, authorizing payroll, and directing bill payments.
• Exclusive Access: For the second entity, she was the sole member-manager, possessing final authority over all managerial decisions, setting employee salaries, and being the only person with signature authority over the bank accounts necessary to authorize federal tax deposits.

The takeaway is clear: Responsibility is a functional test. Anyone with significant control over the disbursement of funds—not just the CEO or President—is a target, particularly those with the independent authority to choose which creditors receive payment.

2. The “Willfulness” Element: The Fatal Choice

The willfulness element is where the corporate veil is most easily pierced, and the Flaim decision illustrates why. Willfulness does not require malice or criminal intent; it merely requires a voluntary and conscious decision to pay other creditors after knowledge of the tax delinquency. The court found this element satisfied by the following:

• Actual Knowledge: Flaim was aware of the outstanding trust fund liabilities, having engaged in multiple contacts with IRS personnel over several years regarding the delinquencies.
• The Payment of Other Creditors: Subsequent to gaining knowledge of the unpaid taxes, Flaim continued to authorize the payment of numerous non-IRS creditors. These payments included supplies, utilities, rent, maintenance, and, critically, net payroll to employees.
• Personal Enrichment: Adding a layer of aggravation, Flaim allegedly authorized payments for her own personal compensation and expenses—such as credit card bills, a husband’s mortgage, and even Netflix—from the business accounts, knowing the trust funds were delinquent.

By choosing to pay any vendor, including employees’ net wages (which require a fresh deposit of trust funds), over the IRS, the responsible person demonstrates the necessary willful disregard for the tax law.

Practice Point: Absolute Priority

The message to business owners is unambiguous: Once an individual with financial control becomes aware of a trust fund tax delinquency, those withheld taxes assume absolute priority over virtually all other unencumbered funds. The funds are, by law, the property of the United States. Choosing to pay vendors, rent, or even the employees’ take-home pay when taxes are delinquent constitutes a willful misappropriation of the Government’s money.

The Flaim case reinforces the aggressive judicial posture that makes defending a TFRP assessment extraordinarily challenging once both responsibility and knowledge are established.

Facing a proposed TFRP assessment or advising a client on payroll tax issues? The determination of responsibility and the existence of willfulness are fact-intensive inquiries that require immediate and specialized legal counsel. Successfully challenging a TFRP assessment hinges on a rigorous defense of authority, control, or knowledge before the case reaches summary judgment.

Contact us for a confidential consultation to strategically navigate a TFRP investigation or assessment and protect your client from personal liability.