IRS Trust Fund Recovery Penalty – What Business Owners Need to Know
If You Owe Payroll Taxes, the IRS Can Come After You Personally
If you run a business with employees and you’ve fallen behind on payroll taxes—specifically the portion you withhold from employee wages—the IRS may assess the Trust Fund Recovery Penalty (TFRP) against you personally.
This penalty doesn’t just apply to corporations. It can be assessed against owners, officers, bookkeepers, and even managers who are responsible for collecting and paying those taxes.
In this post, we explain how the TFRP works, how the IRS determines who’s liable, and what to do if you’ve received notice.
What Is the Trust Fund Recovery Penalty?
When you withhold federal income tax and FICA from employees’ paychecks, you're holding those funds in trust for the U.S. government.
If you don’t remit them, the IRS treats it as theft of federal funds.
The TFRP allows the IRS to:
- Pierce the corporate veil
- Assess civil penalties against individuals
- Enforce collections personally, including IRS wage garnishment actions and tax liens
Related: IRS Wage Garnishment: What It Is and How to Stop It
Who Can Be Held Personally Liable?
The IRS looks for individuals who are:
- Responsible persons – anyone with authority or control over payroll, taxes, or business finances
- Willful actors – someone who knew the taxes were due and chose not to pay
This includes:
- Owners
- Officers
- CFOs or Controllers
- Office Managers
- Bookkeepers
- Payroll coordinators
Even if you’re not the business owner, you could be held liable.
How the IRS Assesses the TFRP
The IRS begins by:
- Sending Letter 1153 (Notice of Proposed Assessment)
- Conducting interviews using Form 4180 (TFRP Questionnaire)
- Reviewing financial and payroll authority
If you don’t respond to the Letter 1153 within 60 days, the IRS will finalize the penalty and add it to your personal account.
What Happens If You Don’t Resolve It?
Once the TFRP is assessed:
- The amount becomes part of your individual IRS balance
- You may receive a responding to an IRS notice of intent to levy if unpaid
- IRS may issue liens against your home or garnish your personal wages
- It can impact your credit, licensing, and ability to operate other businesses
Options to Resolve a TFRP Assessment
1. Challenge the Assessment
If you believe you're not responsible or didn't act willfully, you can:
- File a formal protest after receiving Letter 1153
- Dispute the facts in the IRS file
- Provide affidavits or evidence from other staff or officers
This may involve appealing IRS payroll tax penalties directly through the IRS Appeals Office.
2. Request an Abatement
If the penalty was assessed in error, you can pursue Penalty Relief using Form 843.
3. Negotiate a Resolution
If the balance is valid, you may still:
- Submit an Offer in Compromise
- Request Currently Not Collectible status
- Set up an Installment Agreement
- Seek resolving payroll tax debt through an Offer in Compromise if you qualify
How to Avoid the TFRP in the First Place
- Always pay trust fund taxes before any other bills
- Don’t delegate payroll without oversight
- File returns on time—even if you can’t pay
- Get professional help at the first sign of when payroll taxes fall behind
Related: Behind on Payroll Taxes? Orange County Businesses, Here’s What to Do Now
We Help Orange County Business Owners Fight the TFRP
At Boulanger CPA and Consulting PC, we help business owners and managers:
- Respond to Letter 1153 and IRS interviews
- Dispute TFRP assessments
- Settle TFRP liability for less
- Prevent personal collections and protect assets
You don’t have to face payroll tax penalties alone—learn more in Defend What’s Yours.
Call (657) 218-5700 or request a confidential consult at www.orangecounty.cpa
Frequently Asked Questions
What is the IRS Trust Fund Recovery Penalty?
This penalty is assessed when a business fails to remit withheld payroll taxes. It makes responsible individuals personally liable for the unpaid trust fund portion of employment taxes.
Who can be held personally liable?
Any person with authority over financial decisions—such as owners, officers, bookkeepers, or payroll managers—may be personally liable if they willfully failed to pay trust fund taxes.
How does the IRS determine “willfulness”?
Willfulness means the responsible person knew the taxes were due and chose not to pay. Using funds to pay other creditors instead of the IRS is a common example.
What happens if the penalty is assessed?
The IRS can collect from personal bank accounts, wages, or property of the responsible party. The liability is separate from the business’s debt.
Can the Trust Fund Recovery Penalty be appealed?
Yes. You can appeal before the penalty is assessed by filing a written protest, or challenge the assessment after it’s issued through IRS Appeals or Tax Court.
Can this penalty be discharged in bankruptcy?
No. The Trust Fund Recovery Penalty is considered a nondischargeable tax debt and survives bankruptcy.
How can businesses avoid this penalty?
The best way is to remain compliant with payroll tax deposits, use a reliable payroll provider, and respond quickly to IRS notices regarding payroll tax issues.
Do California tax agencies have similar penalties?
Yes. The California Employment Development Department (EDD) can pursue responsible parties for unpaid state payroll taxes as well.
📣 About the Author
Marc Boulanger, CPA is the founder of Boulanger CPA and Consulting PC, a boutique tax resolution firm based in Orange County, California and trusted by high-income individuals and business owners across Southern California.
With over a decade of experience resolving high-stakes IRS and State tax matters, Marc brings strategic insight to complex cases involving wage garnishments, bank levies, unfiled returns, and six-figure tax debts. He is known for helping clients reduce or eliminate tax liabilities through expertly negotiated settlements and compliance plans.
Marc is a Certified Public Accountant licensed in California and Oklahoma and holds the designation of Certified Tax Representation Consultant. He is a member of the American Society of Tax Problem Solvers (ASTPS) — the national organization founded by the educators and practitioners who have trained thousands of CPAs, EAs, and tax attorneys in IRS representation strategy.
Every case is handled with discretion, proven methodology, and direct CPA-led representation — not call center scripts.
📍 Learn more at www.orangecounty.cpa or call (657) 218-5700.
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