If your business owes payroll taxes, the IRS may not stop at collecting from the company — they can come after you personally. Under the Trust Fund Recovery Penalty (TFRP), the IRS can hold owners, officers, or any person responsible for withholding and paying employee taxes personally liable for 100% of the unpaid amount.
This article breaks down what happens during a TFRP investigation, how the IRS determines who is “responsible,” and the critical defense steps you must take — preferably with an experienced tax attorney at your side.
What Is the Trust Fund Recovery Penalty (TFRP)?
The TFRP is one of the most severe civil penalties in the Internal Revenue Code. It allows the IRS to personally assess the trust fund portion of unpaid payroll taxes against anyone who was:
- Responsible for collecting, accounting for, and paying those taxes, and
- Willfully failed to do so.
The “trust fund” portion refers to taxes withheld from employee paychecks — specifically:
- Federal income tax withholding
- Social Security (employee portion)
- Medicare (employee portion)
How the Trust Fund Recovery Penalty Investigation Begins?
TFRP investigations typically begin after the IRS identifies unpaid payroll taxes through Form 941 or 940 filings, or through a Revenue Officer assigned to your case.
You’ll usually receive one of these letters:
- CP220/CP504: IRS alerts you to unpaid 941/940 taxes
- Letter 1153: Notice of Proposed Assessment (TFRP)
- Form 2751: Proposed Assessment of Trust Fund Recovery Penalty
- Form 4180: Report of Interview used to determine responsibility
💡 Pro Tip: The moment you receive a Letter 1153 or a request for a Form 4180 interview, contact a tax attorney.
📘 Reference: Understanding Your IRS Letter or Notice — IRS
Who Can Be Held Personally Liable?
The IRS doesn’t just target owners. Anyone with authority over financial decisions — even partial — can be assessed the penalty. That can include, to name a few:
- Partners in an LLC or LLP
- Business owners, shareholders, or corporate officers
- CFOs, controllers, and bookkeepers
- Payroll administrators
- Anyone with signature authority over checks
The IRS looks at factors, such as, to name a few:
- Who had authority to pay bills or sign checks
- Who controlled payroll processing
- Who decided which creditors to pay
- Whether the person knew taxes weren’t being paid
📘 Reference: IRM 5.7.3 — Determining Responsibility
How the IRS Determines “Willfulness”?
“Willfulness” doesn’t mean you intended to defraud the government. It simply means that a responsible person knew the payroll taxes were due and made the conscious decision to pay other creditors instead.
📘 Reference: IRM 5.7.3 — Determining Willfulness
What Happens During the IRS Form 4180 Interview?
The Form 4180 interview is the IRS’s key tool to establish “responsibility” and “willfulness.” It’s conducted by a Revenue Officer and covers, to name a few:
- Your title and job duties
- Whether you signed payroll checks or tax forms
- Who controlled financial decisions
- When you became aware of the tax problem
- Whether you attempted to fix it
💡 Important: Do not attend a Form 4180 interview alone.
📘 Reference: IRS Form 4180
Defending Against a TFRP Assessment
Defending against a TFRP case requires showing that you were either:
- Not responsible, or
- Not willful in failing to remit the taxes.
Potential legal defense strategies, to name a few, include:
- Lack of Authority: You didn’t have control over financial decisions or check signing.
- Delegated Responsibility: Another officer or owner controlled tax payments.
- No Knowledge: You were unaware of the unpaid taxes.
- Attempted Compliance: You tried to correct the issue or contacted the IRS proactively.
- Advised by Accountant or Payroll Company: You relied on professional assurances that payments were made.
Consequences of a Final TFRP Assessment
If the penalty becomes final:
- The IRS can collect from your personal income or bank accounts.
- Liens can attach to your property.
- The IRS can seize business assets under collection authority.
- It can offset future tax refunds or apply levies to wages.
- Among other IRS aggressive enforcement actions.
Even bankruptcy won’t remove TFRP debt, as it’s considered trust fund liability.
Why You Need a Tax Attorney — Not Just an Accountant
Accountants can prepare returns, but they cannot defend you in an IRS investigation or appeal. A tax attorney provides:
- Legal privilege: Protects your statements from disclosure under the attorney-client privilege, which accountants don’t have.
- Representation: Communicates directly with the IRS on your behalf.
- Negotiation: Can seek penalty abatement or settlement.
- Protection: Prevents IRS collection while your case is pending.
💡 Pro Tip: Once your attorney submits Form 2848 (Power of Attorney), all IRS communication must go through them — not you.
📘 Reference: IRS Form 2848 — Power of Attorney
Need help with a similar issue? Contact our firm today for a consultation.
The Trust Fund Recovery Penalty can turn a company payroll mistake into a personal financial crisis. The moment you receive a Form 4180 interview request or Letter 1153, you need to take action. The best defense is early, informed, and strategic action. A tax attorney can intervene, protect your rights, negotiate with the IRS, and prevent personal financial damage.
If you’ve been contacted about a payroll tax investigation or TFRP, contact Pelham PLLC today.
We’ll defend your position, challenge liability findings, and negotiate fair resolution before the IRS finalizes its assessment.
FAQs
What is the Trust Fund Recovery Penalty?
It’s a personal penalty equal to 100% of the employee tax withheld but not paid to the IRS.
Can multiple people be held liable?
Yes. The IRS can assess the full amount against each responsible person and collect from any or all of them.
What if I’m not an owner?
Ownership isn’t required.
