TFRP: Trust Fund Recovery Penalty

IRS Letter 1153: Understanding a Proposed TFRP Assessment

Employment or payroll taxes are a unique tax.  The Internal Revenue Service characterizes payroll tax as a ‘trust fund tax’ because the business owner technically holds an employee’s money in “trust” until they make a federal tax deposit for that amount. Since a business owner holds payroll taxes in “trust,” failure to file and failure to pay can result in large penalties and fines. Overall, the Trust Fund Recovery Penalty, or TFRP, was created after a law was passed by the U.S. Congress.  The Trust Fund Recovery Penalty encourages business owners to promptly file and pay withheld income and employment taxes. The TFRP can be assessed without the business stopping their day to day operations.  This penalty can be assessed against one person or multiple people related to the business.  The TFRP may be assessed against a person who either willfully fails to collect or pay the taxes or the person who is responsible for collecting or paying the taxes.  The IRS often uses the term “responsible person” when discussing failure to collect or pay withheld income and employment taxes or collected excise taxes.  This term is broad and can be applied to a specific person or a group of people who have the responsibility to collect, account for, and pay these taxes including:
  • Officer of a corporation
  • Employee of a corporation
  • Corporate director
  • Shareholders
  • A corporation or third party payer
  • Payroll Service Providers
  • Professional Employer Organizations
In order for willfulness to occur, the responsible person should have been aware of any outstanding taxes and either intently did not file or was indifferent to requirements. If a business has payroll tax problems the IRS will want to interview the employees.  This is done to determine the scope of duties and responsibilities of each employee in respect to payroll taxes.   An employee will be found responsible if they exercised independent judgment with the finances of this business. The Trust Fund Recovery Penalty amount is usually a large number.  The IRS computes the penalty by adding the unpaid taxes withheld with the employees portion of the taxes due.  If an individual is found to be a responsible person, the IRS will mail them a letter stating that the Trust Fund Recovery Penalty is going to be assessed against them.  There is a 60 day window in which the individual can appeal.  Even before your payroll tax issues escalate to this level, contact an experienced IRS tax lawyer to assist you.  Business owners will want this situation resolved as quickly and as early on as possible, especially since the IRS has the power to take collection action against you once the penalty is assessed. Avoiding the Trust Fund Recovery Penalty can be simple, as long as all employment taxes are collected, filed, and paid for on time.  It is important to remember that employment and payroll taxes are not the property of the business owner but of the U.S. government on behalf of your employees, and must be paid. If you have received Letter 1153 from the Internal Revenue Service (IRS), the agency likely believes that you willfully failed to collect and remit certain withholding taxes to the federal government. As a result, the agency now proposes to assess a trust fund recovery penalty (TFRP) against you. Receiving this letter may give rise to many questions: Can you be personally liable for a penalty if a business fails to pay trust fund taxes? What if you were an employee who merely followed instructions? What happens if the IRS assesses the TFRP against you, but you do not have the income or assets to cover the liability? In this post, our experienced team at Timothy S. Hart Law Group, P.C. discusses what Letter 1153 means, the reasons for receiving this letter, and what you should do if you have received it.

Why Did You Receive Letter 1153?

If you received this letter, the IRS may want to assess the trust fund recovery penalty against you. This penalty applies when businesses fail to pay payroll taxes, but the penalty doesn’t just apply against the business. The IRS can assess this penalty against a variety of individuals. Do not ignore this letter. The TRFP is one of the IRS’s harshest penalties, and if you want to protect your finances, you need to respond to the letter promptly.

What Are Trust Fund Taxes?

Under tax law, an employer must withhold certain taxes from its employees’ paychecks for payment to the Treasury. These taxes include:
  • Federal income taxes
  • The employee’s share of social security tax
  • The employee’s share of Medicare tax
The employee must hold these taxes in trust until payment to the government via a Federal Tax Deposit. Hence the term “trust fund taxes” refers to taxes that an employer takes out of their employees’ paychecks, but it does not include taxes that an employer must pay out of pocket, such as the business’s share of social security and FUTA.

The Trust Fund Recovery Penalty (TFRP)

A trust fund recovery penalty is a penalty that the IRS assesses against an individual for the willful failure to:
  • Withhold trust fund taxes from employee’s paychecks on behalf of the employer,
  • Account for these payroll taxes, or
  • Pay these taxes to the federal government.
The TFRP can be up to 100% of the uncollected, unaccounted, or unpaid trust fund taxes. For example, suppose Business Owner A’s withholdings consist of employees’ portion of FICA and income tax for the quarter, which amounts to $12,000. In that case, if A willfully fails to pay these taxes to the government and the IRS assesses a TFRP, this business owner will owe the IRS $12,000. Business Owner A may also owe a failure-to-deposit penalty and growing interest on this substantial tax debt.

Who Is a Responsible Person?

A factor contributing to the severity of the TFRP is that the IRS can assess the penalty against any individual the agency deems to be a “responsible person.” For example, when a corporation goes out of business, most of its obligations, including some corporate taxes, are no longer collectible or enforceable. However, because the IRS can go after individuals for the TFRP, this obligation remains intact, even if the separate entity no longer exists. The IRS’s “responsible person” definition is broad and includes any individual who willfully failed to withhold, account for, or pay trust fund taxes. In most cases, a responsible person is the officer of a corporation, a sole proprietor, a partner, or a shareholder. However, a responsible person can also be an employee, such as a bookkeeper or someone with signature authority on a business’s bank accounts. In other words, the IRS can assess this penalty against you personally, even if you are not the company owner. That said, under case law, someone can only be responsible if they have exercised independent judgment in the willful failure to withhold, account for, or pay trust fund tax. For example, someone who fulfills a clerical function and follows the instructions of the business owner may not be liable for the penalty.

The Meaning of Willfulness

When assessing the TFRP against someone who the IRS believes to be a responsible person, the agency must demonstrate willfulness. A responsible person is willful if they were or should have been aware of the trust fund tax obligation. The second requirement of willfulness is the intentional disregard or indifference to the obligation to remit the trust fund taxes.

The TFRP Assessment Process

The IRS uses a federal tax deposit alert program that detects anomalies in employers’ payroll tax deposit patterns. This system flags employers who missed their tax deposit due dates and alerts revenue officer groups. Once a revenue officer receives an alert, they must review the employer’s payroll history. If the revenue officer detects issues, they must contact a representative, such as the company owner, and request the documents and information they need for an investigation. The revenue officer may also compel the business to comply with payroll taxes. For example, the revenue officer may take collection action against the business or file a substitute for return (SFR). However, if a business has fallen behind on its trust fund tax obligations, the revenue officer may proceed by assessing the TFRP against responsible persons. This process starts with a Form 4180 interview.

The Form 4180 Interview

If the IRS believes you are responsible, the agency will request that you participate in a trust fund recovery penalty interview. During this interview, a revenue officer asks questions to complete Form 4180 (Report of Interview with Individual Relative to Trust Fund Recovery Penalty). This interview aims to determine if you are willfully responsible for the employer’s unpaid trust fund taxes. If you have received a summons to attend a Form 4180 meeting, contact us at Timothy S. Hart Law Group, P.C. so that we can help you prepare for the interview and defend the penalty assessment.

What Is Letter 1153?

Following the Form 4180 interview, if the IRS believes a person is responsible for not paying trust fund taxes, the agency will issue Letter 1153, proposing a penalty assessment. This letter explains the liability for the penalty under the Internal Revenue Code and notes that the penalty equals the unpaid trust fund taxes. Additionally, the letter explains that if the recipient agrees with the proposed assessment, they should sign the enclosed Form 2751 and return it to the IRS. When you receive Letter 1153, it means that the IRS is trying to hold you responsible for the unpaid trust fund taxes. Consult with a reputable tax attorney before responding to this letter, especially when facing a high penalty amount or if you were not responsible for unpaid taxes.

Responding to Letter 1153

You can respond to Letter 1153 in one of three ways:
  • Agree to the proposed assessment by signing and submitting Form 2751.
  • Resolve the matter informally by contacting the revenue officer within ten days of the letter’s date.
  • Protest the assessment by mailing a written appeal to the IRS within 60 days of the letter’s date.
Generally, individuals who receive Letter 1153 should only agree to an assessment after consulting with a tax attorney. Don’t let the IRS assess this penalty against you if you don’t agree with it or think that you should not be held responsible. Once the IRS assesses this penalty against you, it can collect this amount by: Because of these aggressive actions, you must avoid a TFRP assessment at all costs. Doing nothing and hoping the issue will disappear is another pitfall you must avoid. Once the 60-day appeal period passes, the IRS will make this assessment against you. There have been cases where clerical employees with no real payment authorization faced penalties because they failed to protest an assessment in time. In short, if you receive Letter 1153, contact a reputable tax attorney immediately and schedule a consultation.

The IRS Has Assessed a TFRP Against Me – What Now?

Unfortunately, avoiding a TFRP assessment is not always possible. If you were responsible and willful in not paying tax withholdings to the government, you will be liable for the trust fund recovery penalty. If the penalty is relatively low, paying it is often the best course of action, even if you need to sell an asset or two. However, if you are facing a penalty of hundreds of thousands of dollars, you must consider tax relief or repayment options. These options include, among others, an offer in compromise, an installment agreement, and currently not collectible status.

Frequently Asked Questions

Why does the IRS take trust fund taxes so seriously?

The IRS goes after individuals with a high TFRP because it considers the willful failure to pay tax withholdings to be tax evasion. According to the IRS, someone who fails to remit trust fund taxes steals from the government two times: Firstly, the government does not receive the trust fund taxes from the employer. Secondly, the employee receives a credit for the tax withholding on their return, even though the employer did not remit these funds to the government. As a result, the IRS assesses the penalty against individuals as a punishment. This penalty aims to make an example of employers who fail to pay trust fund taxes. This penalty also serves as a deterrence. For example, if you are an employer and want to use payroll taxes to pay your vendors instead of the government, this penalty will likely make you think twice.

How long does the IRS have to assess a TFRP?

The IRS has three years to assess a TFRP. This three-year period starts on April 15, the year following the trust fund taxes’ filing due date. For example, suppose Company A was supposed to pay trust fund taxes during October 2021. In that case, the IRS has from April 15, 2022, to April 14, 2025, to assess the TFRP. If the IRS has not assessed the penalty before the three years, the agency can no longer hold interviews or assess the penalty against someone it deems responsible.

How long does the IRS have to collect a TFRP?

Once the IRS assesses a tax liability, it has 10 years to collect this debt. The collection period ends on the Collection Statute Expiration Date (CSED) when the IRS can no longer issue a tax bank levy, garnish wages, or take any other collection action. This collection period also applies to the trust fund recovery penalty. Once the IRS has assessed this penalty, it has 10 years to collect this debt. However, this collection period only starts after an employer has filed a return. Additionally, the IRS can extend this collection period for employer returns claiming the retention tax credit. If an employer undergoes an ERC audit after the expiration date, and the IRS refuses their claim, the agency can still collect the penalty.

Seek Legal Assistance in Responding to IRS Letter 1153

Trust fund recovery penalties can pose a significant challenge to employers and other responsible persons. If you received IRS Letter 1153, you must take urgent steps to avoid an assessment. If the IRS has already assessed a substantial penalty against you, immediate action can make this debt more manageable. In either case, consulting with a reputable tax attorney is crucial to ensure financial stability. At Timothy S. Hart Law Group, P.C., we have the expertise and experience to help you navigate your tax situation. Contact us today to schedule a consultation and take the first step toward resolving this matter between you and the IRS.

Attorney Timothy Hart

Timothy S Hart, the founding partner of the tax law firm of Timothy S. Hart Law Group, P.C. is both a New York Tax Lawyer & Certified Public Accountant. His area of expertise includes innovative solutions to solve your Internal Revenue Service and New York State tax problems, including tax settlements through the Federal and New York State offer in compromise programs, filing unfiled tax returns, voluntary disclosures, tax audits, and criminal investigations. [ Attorney Bio ]