A “100% penalty” can be assessed against a responsible person when federal income tax and/or federal employment taxes are withheld from employee paychecks but aren’t handed over to the government.
This Trust Fund Recovery Penalty got its informal “100% penalty” moniker from the fact that the entire unpaid amount can be assessed against a responsible person (or several responsible persons). The purpose of the penalty is to collect withheld but unpaid federal taxes from individuals who had control over an employer’s finances.
Often, operating a business as a corporation protects the individual owner from personal liability for some corporate debts. In cases of unpaid payroll taxes, however, the corporate shield or corporate veil is “pierced” and the IRS looks past the corporation to the responsible person to pay the debt.