Trust Fund Recovery Penalty?
If your business has fallen behind on payroll taxes, the IRS may have a way to hold you personally responsible for part of the debt—even if your business is an LLC or corporation.
That is where the Trust Fund Recovery Penalty, commonly called the TFRP, comes into play.
The TFRP can turn a business payroll tax problem into a personal tax liability for the people the IRS believes were responsible for collecting, accounting for, or paying certain employment taxes.
For a business owner, this is a serious matter that should not be ignored.
What Is the Trust Fund Recovery Penalty? 
The Trust Fund Recovery Penalty is a penalty the IRS can assess against individuals who are responsible for collecting and paying certain employment taxes but willfully fail to do so.
The penalty generally applies to the employee portion of federal income tax withholding and Social Security and Medicare taxes withheld from employees’ wages.
These taxes are called “trust fund taxes” because the employer collects the money from employees and is supposed to hold it in trust until it is paid to the government.
The important point is this:
The IRS may be able to collect these unpaid trust fund taxes from you personally.
This can happen even when the business itself is a corporation or LLC.
Who Can Be Held Personally Responsible?
The IRS does not automatically assess the TFRP against every business owner.
Instead, it looks at who was responsible for making sure the payroll taxes were properly collected, reported, and paid.
Depending on the circumstances, this could include:
- Business owners
- Corporate officers
- Partners
- Bookkeepers
- Payroll managers
- Accountants
- Other employees with authority over payroll or company finances
The key question is not simply whether someone owned the business.
The IRS generally examines whether the person was a “responsible person” and whether that person willfully failed to collect or pay the trust fund taxes.
What Does “Willful” Mean?
Willfulness is an important part of a TFRP case.
The IRS generally looks at whether the responsible person knew, or should have known, that the payroll taxes were unpaid and chose to pay other creditors instead.
For example, imagine a business is behind on its payroll taxes.
The owner knows the IRS has not been paid, but the business continues paying vendors, credit cards, suppliers, or other creditors instead of paying the payroll tax liability.
That conduct could potentially expose the owner to the Trust Fund Recovery Penalty.
Simply making a mistake does not necessarily mean the TFRP applies. The specific facts surrounding the business, the individual’s authority, and the person’s knowledge are important.
How Much Is the TFRP?
The TFRP can be substantial.
Generally, the penalty is equal to the unpaid trust fund portion of the employment taxes.
This can include federal income tax withholding and the employee’s share of Social Security and Medicare taxes.
Interest and other penalties may also apply to the underlying tax liabilities.
This is why a business owner who receives an IRS notice concerning the TFRP should take the matter seriously.
A payroll tax problem that initially belongs to the business can potentially become a personal financial problem.
How Does the IRS Determine Responsibility?
IRS typically conducts an investigation before assessing the TFRP against an individual.
The IRS may ask questions about who:
- Signed business checks
- Controlled business bank accounts
- Determined which creditors were paid
- Hired and fired employees
- Controlled payroll
- Signed payroll tax returns
- Had authority to make federal tax deposits
- Communicated with the IRS about the tax debt
The IRS may use Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes, during its investigation.
You should be careful when responding to an IRS Revenue Officer’s questions because your answers can affect whether the IRS determines that you are personally liable.
Don’t Wait Until the IRS Assesses the Penalty
One of the biggest mistakes a business owner can make is waiting until the IRS formally assesses the TFRP before getting professional help.
Once the IRS establishes personal liability, the government can pursue collection against the individual.
That may include federal tax liens, levies, and other collection actions.
If you are already dealing with an IRS Revenue Officer or have received correspondence concerning the Trust Fund Recovery Penalty, you should understand your rights and options before making statements or signing documents.
Payroll tax problems can become much more expensive when they are allowed to continue.
The good news is that a TFRP case should be evaluated based on the facts. The IRS must establish responsibility and willfulness before imposing the penalty.
If you are concerned that your business payroll tax problem could become a personal liability, now is the time to address it—not after the IRS has already made its determination.
Don’t let a business payroll tax problem become your personal financial crisis.
Take our Payroll Tax Problems Scorecard to better understand your potential exposure and the steps you may need to take to address the problem.