Are You A "Responsible Person" for Trust Fund Recovery Penalty

The IRS assesses the Trust Fund Recovery Penalty (TFRP) against individuals who are responsible for a business not paying its payroll taxes. The IRS has the authority to hold a broad range of people responsible, including owners, shareholders, employees, and third parties such as outside accountants or payroll services.

The TFRP is 100% of the unpaid withheld FICA and income taxes, making it one of the IRS's harshest penalties. Once assessed, the penalty can't be discharged in bankruptcy, and the IRS can go after your personal assets to collect it. To protect yourself, you need to understand what constitutes a responsible person and when to hire representation. 

Key takeaways

• TFRP - 100% of taxes withheld from employee pay but not remitted to the IRS.
• Responsible person - anyone who made financial decisions in the company.
• Willful action - when a responsible person takes an action, such as paying other bills instead of payroll taxes.
• TFRP investigation - the IRS will investigate the company and hold interviews to identify responsible persons.
• Assessment process - the IRS sends Letter 1153 to propose a TFRP assessment. If you don't appeal, they'll assess the penalty and start collections.

What Is the TFRP?

The Trust Fund Recovery Penalty is a penalty that the IRS assesses when a business doesn't pay taxes withheld from its employees' paychecks. The penalty is 100% of the unpaid taxes. The IRS can also assess a TFRP for unpaid excise taxes.

This is one of the few penalties that allows the IRS to pierce the corporate veil - that means that the corporate and/or limited liability structure doesn't protect the business's owners. Rather, the IRS can go after individuals for the business's debts and not just owners — employees, and third parties too.

Who Is Considered a "Responsible Person"?

For the TFRP, the IRS defines a responsible person as someone who:

• Is responsible for collecting and paying the withheld taxes or excise taxes, and
• Willfully fails to pay.

That includes anyone who makes decisions about the business's finances. That may include owners, shareholders, board members, managing partners, controllers, bookkeepers, staff from the human resources or payroll department, or third parties contracted to help with the business's payroll. Generally, the IRS sees check-signing authority as responsibility, unless that individual only rarely signs checks. 

For example, if a bookkeeper decides whether to pay payroll taxes or allocate the funds to other bills, they are likely to be considered a responsible person. However, if a bookkeeper only writes checks based on the directions of their employer, they are probably not a responsible party.

However, that line can vary when you're dealing with a certified tax professional. Say the business has a CPA running its payroll department. The CPA writes checks under the owner's direction. However, the CPA's professional credentials require them to act ethically, and they should know this is illegal. In this type of situation, "following orders" may not be a valid claim to get out of being considered responsible. 

To give you another example, consider an outside payroll company that handles a business's finances with a lot of autonomy. They prepare the company's tax returns, plan its budget with the company president, and authorize bill payments without prior approval from the president. If that firm doesn't pay the payroll taxes, the IRS may label them as a responsible party. 

The IRS doesn't just pick a single responsible person - often, the agency assesses this tax against multiple people. 

Risk Factors That Increase Your Exposure

There's a lot of grey area in identifying a responsible person, but there are a few risk factors you should be aware of. Here are some signs that the IRS may consider you responsible:

• You knew the payroll taxes weren’t being paid — or should have known. 
• You had the authority to pay the IRS, but you prioritized vendors or other bills instead.
• You signed checks or had access to bank accounts.
• You were involved in business decisions while payroll taxes were going unpaid.

Consider this scenario: say a business owner thought their accountant was taking care of the payments. However, during the period when the taxes were not being paid, the owner accessed the company bank account multiple times and signed quarterly returns that indicated payroll deposits weren't made. 

If the owner claims they didn't know and thus can't be held responsible, the IRS may consider that to be willful blindness. In that case, the IRS will likely determine the owner to be a responsible party. 

In contrast, imagine a bookkeeper who signs checks. At first, the IRS considers this person to be responsible because they had the right to sign checks. However, after further investigation, the IRS realized that the bookkeeper didn't have any authority over which checks got written. Instead, they received a list from their employer every day, and then, they wrote out the checks on the list and updated the books accordingly. 

To determine whether or not someone is a responsible party, the IRS uses a TFRP interview. 

How the IRS Investigates and Assesses the TFRP

Often, the process starts with a Failure to Deposit alert. If a business doesn't make its payroll deposits or deposits less than usual, the IRS's systems will flag the account, and a revenue officer will pay a visit to the business. If the owner isn't there, the revenue officer will leave a 5664 letter for them. Then, the Revenue Officer may request a phone call using Letter 5857.

The IRS often starts by looking at the company's payroll tax returns to learn more about the company, for instance, its employees and third parties that file the returns. Then, the agency typically gathers information about the business using Form 4181 (Questionnaire Relating to Federal Trust Fund Tax Matters of Employer). The IRS uses this form to collect information about the business's payroll processes and its employees. 

If the IRS thinks you might be a responsible party, they'll send you a letter requesting an interview. During the interview, the IRS employee will complete Form 4180 (Notice of Interview). They will also attempt to gather info about other people in the company, and they may attach affidavits to the form to flesh out yes-no answers. Check out our tips on how to avoid a TFRP interview.

TFRP Assessment Process

If the IRS deems you responsible, they'll send you a notice saying that they plan to assess the trust fund recovery penalty against you — that's Letter 1153 and Form 2751 (Proposed Assessment of Trust Fund Recovery Penalty). 

At that point, you have 60 days to appeal (75 if the letter was sent to an address outside the country). You must appeal by this deadline, or you will miss your chance. Once the IRS assesses the penalty, you have no appeal options; however, you may be able to pay and request a refund using Form 843.

You can also ask the revenue officer to consider new information about your case, but you must do so within 10 days of the notice date. TFRPs are also eligible for fast-track mediation, which allows you and the revenue officer to sit down with a mediator to discuss your concerns. Either you or the revenue officer can request mediation, but you both must agree to it. 

Note that if you request mediation or a revenue officer review, you don't get any extra time to appeal. If you see the appeals deadline approaching and you still haven't reached a resolution, make sure to enter your appeal. 

If you decide to appeal, you can request small case procedures if the penalty is less than $25,000 — this is a slightly more casual process than formal appeals. Otherwise, you must write a protest letter to start the appeals process. The letter should include your details, a copy of Letter 1153, the tax period, and the issues you want to contend, along with statutes to support your position. 

If you don't appeal or if your appeal is rejected, the agency will assess a penalty against you. If you don't pay, the IRS can involuntarily collect the tax using tax liens, wage garnishments, bank levies, and asset seizures. 

Common Misconceptions

If you're involved with a business that has unpaid payroll taxes, don't assume that you're not responsible. The IRS has broad authority to assess this tax against a wide range of individuals, and you need to brace for the worst. Take a look at these common misconceptions:

• I don't own the company, so I'm safe. That is false. Owners, employees, and others can be deemed responsible. 
• Only the payroll department handles taxes. That is not always true. Anyone who makes financial decisions, including paying bills or making owner draws from the company bank account, may be considered to be responsible. 
• I don't sign the payroll tax returns - the IRS looks at many other factors beyond signatures on tax returns to determine personal liability. 

Consider contacting a tax professional if there's any risk that the IRS may come after you for this penalty. 

Why Early Action Is Critical

The sooner you deal with this risk, the better. Talking with an attorney can help you learn more about what the IRS considers when identifying a responsible party - if relevant, you may be able to shift some of your duties at your company so that you're not likely to be considered responsible. But to be effective, this would have to happen as early as possible and before the company gets behind on payroll taxes.

If the IRS is already on the hunt for a responsible party, you may receive details about a Form 4180 interview. If so, a tax pro can represent you in the meeting, ensuring that your rights are protected and that you answer the interviewer's questions in the most effective way possible. 

If the IRS has already notified you about a TFRP assessment, a tax pro can help you appeal. That may include proving that you weren't responsible or potentially even disputing the underlying tax liability. If you don't get help at this point, the situation will escalate.

Once the penalty is assessed, a tax pro can help you understand appeal options — depending on the situation, the only option may be to pay and then request a refund. But this is a risky move, and you may have to go to Tax Court to get the funds back, if that's even possible.

A tax pro can also help you set up payments, apply for settlements, and appeal collection actions. In all cases, the sooner you take action, the better. To protect yourself, contact a tax professional as soon as possible. 

How TaxCure Can Help You Find TFRP Expertise

TaxCure is the nation's only directory of tax professionals focused on resolution work. All of the pros listed on TaxCure have been carefully vetted, and when you search, you can narrow down the results to find someone who has dedicated experience with the trust fund recovery penalty. 

A tax attorney, CPA, or enrolled agent can help you prepare for TFRP interviews, represent you in interviews, respond to IRS requests for information, and help you avoid this penalty. If the penalty is assessed, they can help you apply for abatement, make payment arrangements, avoid collection actions, and get back into good standing with the IRS. 

You don’t have to handle this alone - and you shouldn’t. Use TaxCure to connect with an experienced tax professional today.

FAQs About Responsible Parties for the TFRP

Can the TFRP be assessed against multiple people?

Yes, the IRS often assesses the TFRP against multiple people — each of these people is jointly and severally liable for the penalty. That means that the IRS can go after one person for the full liability. 

However, if that happens, you have a federal right of contribution, and if you pay more than your share of the TFRP, you can sue the other parties for their portion of the penalty in civil court. The IRS must release the names of all other individuals the TFRP has been assessed against, so that you can pursue this option.

What is Form 4180, and how should I prepare?

Form 4180 is the form the IRS officer uses to gather information about potential responsible parties. The IRS will schedule an interview with you to gather the information on this form. Then, they'll use that information to determine whether or not you should be liable. 

How do I defend myself against the TFRP?

First, be aware of how the IRS defines a responsible party. Then, be prepared to argue that you are not responsible because you don't make financial decisions for the company, and you didn't willfully fail to pay payroll taxes. 

What if I didn’t make the decisions, but still had a title?

The IRS scrutinizes business owners and executives when determining who's responsible. If you don't play an active role in the company's finances, you need to explain that to the IRS to protect yourself. 

Can I settle or negotiate a TFRP once it’s assessed?

Yes, if you qualify, you can get an offer in compromise on a TFRP, but if the penalty has been assessed against multiple parties, the IRS can continue to go after those other people for the remainder of the balance. 

Is the TFRP dischargeable in bankruptcy?

Businesses cannot discharge the TFRP in bankruptcy, and in most cases, neither can individuals.