A single letter from the IRS can change everything for a business owner or executive. Payroll taxes that were once just another line item on a balance sheet can suddenly become a personal legal threat. The moment the IRS questions missing or late employment tax deposits, the issue is no longer just about a simple payment oversight or cash flow problem – it becomes a serious legal matter that can result in personal liability for those responsible for handling the company’s finances.
The trust fund recovery penalty doesn’t just target businesses; it reaches directly to the people behind the decisions: owners, managers, officers, and anyone, who are responsible for withholding and remitting payroll taxes to the IRS but fail to do so. Even a short-term cash flow problem or a bookkeeping oversight can trigger a situation where the IRS holds individuals personally liable for thousands, sometimes hundreds of thousands, of dollars in unpaid payroll taxes.
This penalty is not theoretical. The IRS enforces it aggressively, and the financial and legal consequences can be severe. This blog post highlights what’s at stake when a trust fund recovery penalty is on the line and explains how the right legal guidance can help you protect your future.
What Is the Trust Fund Recovery Penalty (TFRP)?
| The trust fund recovery penalty, often called TFRP, comes into play when a business does not send certain payroll taxes to the government as required. |
When a company takes out federal income tax, Social Security, and Medicare from employees’ paychecks, that money is not for the business to keep. Instead, these amounts are supposed to go directly to the IRS. This is why they are known as “trust fund taxes”; the employer is holding those funds for the government.
If those payroll taxes are not paid to the IRS on time, the agency can look beyond the business itself. The IRS has the authority to hold certain individuals personally responsible for the unpaid amount.
Who Can Be Held Responsible?
The TFRP not only applies to business owners. The IRS can assess this penalty against anyone who meets two main conditions:
- The person had the authority or duty to collect, account for, or pay over the trust fund taxes, and
- The person willfully failed to do so.
This could include an owner, a partner, or a corporate officer. In many cases, it might also include an employee who manages finances or payroll. Sometimes, even an outside advisor or a payroll service provider could be considered responsible. More than one person can be held liable, and each one may be responsible for the entire unpaid amount.
| The Term “Willful” Is Important Here! Willfulness does not require any kind of bad intention, such as evil intent or a bad motive. It simply means the person knew, or should have known, that the taxes were not being paid and did not act to correct the problem. For instance, choosing to pay other bills instead of sending the required taxes to the IRS counts as willful behavior, even if the decision was made to keep the business running. |
How Does a Trust Fund Recovery Penalty Investigation Work?
The IRS follows a clear, step-by-step process when conducting a trust fund recovery penalty investigation.
- Notice of investigation
The process begins with the IRS sending a formal notice of investigation to the business or potential responsible individuals involved. This notice may arrive by mail or be delivered in person. It signals that the IRS is officially reviewing unpaid trust fund taxes and considering personal liability.
- Document requests and evidence gathering
A revenue officer is assigned to the case. The officer requests business documents, such as bank records, payroll reports, and records showing who controls the company’s finances and pays bills. The purpose is to identify who had authority over finances and payroll decisions during the time the taxes went unpaid.
- Interviews with potentially responsible individuals and Form 4180
The revenue officer schedules interviews with individuals who might be responsible for the unpaid taxes. These interviews are usually conducted using IRS Form 4180. If an individual does not participate, a legal summons may be issued to require cooperation.
- Determining responsibility and willfulness
Once the revenue officer has gathered evidence and interviewed potential responsible individuals, the officer must determine responsibility and willfulness. The IRS must establish two elements for assessing the TFRP against anyone who meets two main conditions, responsibility and willfulness. First, responsibility means the person had significant control over the business’s finances, such as making financial decisions, signing checks, determining which creditors to pay, or overseeing payroll and tax compliance. Responsibility is based on actual authority, not just job titles, and can include owners, officers, employees, third-party payroll providers, and others with significant control. Second, willfulness means the failure to pay over the trust fund taxes was intentional, deliberate, voluntary, or reckless, not accidental. In this context, the person knew, or should have known, about the unpaid taxes and chose to pay other creditors instead of the IRS, or acted with reckless disregard of the tax obligations (such as ignoring IRS notices or failing to act after learning of the delinquency).
- Notice of proposed assessment
If the IRS believes an individual is or individuals are liable, it issues a 60-Day Notice of Proposed Assessment (Letter 1153), giving the individual(s) the opportunity to respond. The notice details the proposed penalty and the evidence supporting the IRS’s determination, as well as information on how to appeal.
- Opportunity to appeal
An individual who received a 60-Day Notice of Proposed Assessment has the right to challenge the proposed assessment. The individual can submit a written protest to the IRS Office of Appeals to contest the proposed assessment. A well-prepared protest can present evidence that the individual was not responsible or did not act willfully, potentially avoiding the penalty. If the protest is unsuccessful, the IRS will proceed with the assessment.
- Assessment and collection
If an appeal is not pursued or is not successful, the IRS officially assesses the penalty. Once assessed, the TFRP becomes a personal liability, and the IRS can use its collection tools (liens, levies, etc.) to recover the penalty from the responsible individual(s).
What Happens After the IRS Assessment?
- Notice and Demand: The IRS will issue a formal notice and demand for payment. If payment is not made, enforced collection actions may proceed.
- Interest Accrual: Interest continues to accrue on the unpaid penalty from the date of assessment until it is paid in full.
- IRS Collection Actions: The IRS will begin collection efforts against the responsible person. This includes the use of standard IRS collection tools such as federal tax liens, wage garnishments, bank levies, and the seizure of personal assets to satisfy the penalty.
- Statute of Limitations: The IRS generally has 10 years from the date of assessment to collect the TFRP. This period can be extended under certain circumstances, such as when an installment agreement or an offer in compromise is in place.
Resolution Options for the Trust Fund Recovery Penalty
There are several collection alternative options available for individuals assessed with the:
Installment Agreement
The responsible person can request to pay the TFRP in monthly installments if they are unable to pay the full amount at once. This approach breaks the total amount into smaller payments, making it easier to manage over time instead of paying everything at once. The IRS will review financial information to determine an appropriate payment plan.
Offer in Compromise
In some cases, it’s possible to work out a deal with the IRS to settle the debt for less than the original amount. This allows the responsible individual to settle the debt for less than the full amount owed, subject to IRS approval. While the IRS is strict about reducing TFRP, this option may be available if paying the full sum would create significant financial hardship.
Currently Not Collectible (CNC) Status
If the person’s financial situation is such that they cannot pay anything toward the penalty, they may request CNC status. This temporarily halts IRS collection actions, though interest and penalties continue to accrue.
Each of these collection alternatives comes with its own set of eligibility criteria and application processes. The IRS thoroughly evaluates all requests before granting approval. It’s essential to submit complete and accurate documentation when applying for relief. Consulting with a knowledgeable tax professional can greatly improve your chances of achieving a favorable resolution.
Take Control of Your TFRP Case with Expert Guidance
Dealing with a trust fund recovery penalty is never simple, and every situation comes with its own set of issues. Many people face this issue because of business stress or honest mistakes, not because they set out to break the law. The IRS process can be demanding, but with knowledgeable support, it is possible to address the matter and protect what matters most.
Diana Pelham is a trust fund recovery penalty lawyer who focuses her practice on tax controversy and tax litigation, which includes helping clients who are dealing with IRS penalties like the trust fund recovery penalty.
Based in Washington, D.C., she serves clients across the United States and also advises U.S. taxpayers living abroad for work, study, or other reasons. At Pelham PLLC, clients receive guidance on a wide range of tax problems, from audits and appeals to fraud investigations and litigation.
If you are facing a trust fund recovery penalty investigation or have another complex tax concern, consider Pelham PLLC for a confidential consultation. Acting early can give you more options and help you move forward with greater confidence.
FAQs
Can the IRS pursue the Trust Fund Recovery Penalty against more than one person at the same time?
Yes, it’s not unusual for the IRS to go after several people within a company if they believe more than one person had control over payroll taxes and didn’t act to pay them. Each individual might be held responsible for the full amount, but the IRS only collects what is actually owed in total.
When this happens, having a tax attorney like Diana Pelham on your side can make a real difference. She reviews the facts, clarifies your actual role, and works to protect you from being unfairly held liable for someone else’s decisions.
How long does the IRS have to assess the Trust Fund Recovery Penalty after payroll taxes go unpaid?
The IRS generally has three years from the date the payroll tax return was filed or required to be filed-whichever is later-to assess the Trust Fund Recovery Penalty (TFRP) against responsible individuals. This three-year statute of limitations is subject to certain exceptions, such as cases involving fraud or if the tax return was never filed, in which case the IRS may have an unlimited period to assess the penalty. The assessment period begins once the IRS identifies the unpaid trust fund taxes and investigates who is responsible.
If you are unsure about how these rules apply to your situation, Pelham PLLC can review your case and explain the assessment timeline in detail. With Diana Pelham’s experience in tax controversy and litigation, she helps clients understand their rights and the steps the IRS may take in trust fund cases.
Can I appeal the TFRP assessment?
Yes. You have the right to appeal the IRS’s decision. You must file a written protest within the timeframe specified in the notice (usually 60 days). If you miss the appeal window, you may still be able to seek relief through a refund claim and, if denied, pursue the matter in federal court.
If you’re in this position, working with a tax attorney like Diana Pelham can be helpful. She reviews your situation, explains what the IRS’s actions mean for you, and helps you understand your options for moving forward.
Can the Trust Fund Recovery Penalty be discharged in bankruptcy?
No, this penalty is not wiped out in bankruptcy. The IRS can still pursue collection from responsible individuals, even if the business or person files for bankruptcy.
Diana Pelham advises clients on all available options, including payment plans or other relief.
What kind of documentation is helpful if I need to defend myself against a TFRP assessment?
To effectively defend yourself against a TFRP assessment, it is crucial to gather and present documentation that demonstrates either your lack of responsibility for payroll tax compliance or the absence of willfulness in the failure to pay those taxes. The types of documentation that are particularly helpful are corporate records, bank records, financial records, board meeting minutes and resolutions, and job descriptions and employment agreements.
Diana Pelham works closely with clients to organize this evidence and present a strong case to the IRS, aiming for the best possible outcome.
