What Is the Trust Fund Recovery Penalty (TFRP)?
When a business runs payroll, it withholds federal income tax and the employee’s share of Social Security and Medicare taxes from each paycheck. The employer holds those amounts in trust until it pays them to the government. That is why the IRS calls them “trust fund” taxes.
When a business faces cash flow problems, it may use withheld funds to pay other expenses, such as rent, suppliers, or net payroll, instead of paying the IRS. The IRS will seek to collect the unpaid taxes from the business. It can also assess the trust fund recovery penalty against a person who was responsible for paying over those taxes and willfully failed to do so.
The TFRP creates personal liability equal to the unpaid trust fund portion of the employment taxes. It does not include the employer’s matching share of Social Security and Medicare taxes or the penalties and interest charged to the business.
Who Can the IRS Hold Personally Responsible?
To assess the TFRP, the IRS must determine who was responsible for collecting, accounting for, or paying over the taxes. A person’s job title or ownership interest alone does not settle the question. The IRS looks at whether the person had meaningful authority over the business’s finances, including the ability to decide which creditors were paid.
People the IRS may investigate include:
- Owners, partners, and corporate officers
- People authorized to sign company checks or direct payments
- People who signed payroll tax returns
- Bookkeepers, controllers, and office managers with authority to decide which creditors to pay
- In some circumstances, outside accountants, lenders, or payroll service providers
Signing checks or carrying out a supervisor’s payment instructions does not, by itself, make someone responsible. More than one person can be held liable, and the IRS can seek the unpaid amount from any responsible person, without collecting it more than once. An owner who delegates financial tasks does not automatically escape liability. The questions remain whether that person had sufficient authority and whether the failure to pay was willful.
What Does “Willful” Mean?
Generally, willfulness means the person knew or should have known the taxes were unpaid and intentionally disregarded that obligation or was plainly indifferent to it. The IRS does not have to prove an intent to cheat the government or a bad motive.
For example, using available funds to pay employees or vendors after becoming aware that trust fund taxes are unpaid can be evidence of willfulness. Cash flow problems alone do not eliminate TFRP exposure.
How Does the IRS Build Its Case Against a Responsible Person?
Before proposing the TFRP, an IRS revenue officer investigates. That investigation may include:
- Reviewing bank statements, signature cards, and canceled checks to identify who controlled payments
- Reviewing payroll tax returns and related records
- Interviewing owners and employees using Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty
The Form 4180 interview matters. Its questions are broad, and an answer without context may give an incomplete picture of someone’s actual authority. Understanding what is being asked, and why, before the interview is important.
IRS Letter 1153 and the 60-Day Window
If the IRS proposes to assess the TFRP against you, it will send Letter 1153, Proposed Trust Funds Recovery Penalty Notification, generally with Form 2751, Proposed Assessment of Trust Fund Recovery Penalty. Form 2751 asks you to agree to the proposed assessment.
You can:
- Sign Form 2751 if you agree with the proposed liability. Understand the determination and your options before signing.
- File a timely written protest if you disagree. You can present evidence that you were not responsible or did not act willfully and request review by the IRS Independent Office of Appeals.
- Take no action. If you miss the deadline, the IRS may assess the penalty and begin collection.
The response period is generally 60 days from the date of Letter 1153, or 75 days if the letter is addressed to you outside the United States. Review the letter and its instructions promptly.
If the Penalty Has Already Been Assessed
Once assessed, the TFRP is a personal liability. The IRS generally has 10 years from the assessment date to collect it, although that period may be suspended or extended in some circumstances. The IRS may file a federal tax lien or levy wages or bank accounts.
Depending on the facts and procedural stage, options may include an administrative appeal, a refund claim and subsequent challenge, or collection alternatives such as an installment agreement or offer in compromise.
The Bottom Line
The trust fund recovery penalty can turn unpaid business payroll taxes into a personal liability. If your business is behind on payroll taxes or a revenue officer has requested an interview, seek advice before the interview. If you have received Letter 1153, pay close attention to the response deadline.
McDowell Law Group represents business owners and employees in payroll tax matters before the IRS, from the initial investigation through Appeals and collection. To discuss your situation, contact McDowell Law Group to schedule a consultation.
This article is provided for general informational purposes only and does not constitute legal or tax advice, nor does it create an attorney-client relationship. The law discussed here is unsettled and subject to change, including as a result of the pending appeal. Deadlines and outcomes depend on your specific facts. Please consult a qualified tax professional about your individual situation before acting.