Trust Fund Recovery Penalty Defense — Protect Your Personal Assets

The Trust Fund Recovery Penalty (TFRP) is a penalty under Internal Revenue Code Section 6672 equal to 100% of the unpaid trust fund portion of employment taxes. The trust fund portion consists of the federal income tax, Social Security, and Medicare taxes that were withheld from employees' wages. Because the employer holds these amounts in trust for the government, the IRS treats non-payment as a serious violation and can assess the penalty personally against any responsible person who acted willfully. The TFRP is a civil penalty — not a criminal one — but the financial consequences can be devastating because it pierces the corporate shield and exposes personal assets to IRS collection.

A responsible person is anyone with the authority and duty to collect, account for, or pay over payroll taxes. The IRS applies a multi-factor test examining: who had authority to sign checks, who determined which creditors to pay, who had control over payroll and tax filings, who had the power to hire and fire, who held corporate office, and who owned shares or had an ownership interest. No single factor is determinative — the IRS looks at the totality of circumstances. More than one person can be deemed responsible, and the IRS can pursue each responsible person for the full penalty amount. Critically, you do not need to have actually signed checks or tax returns to be considered responsible — having the authority to direct payments is enough.

In TFRP cases, 'willfully' does not require criminal intent or a bad motive — it is a lower standard. It means the person knew the taxes were owed and chose to pay other creditors instead, or acted with reckless disregard for whether the taxes were paid. Even if the business was struggling and the person felt they had no choice but to pay suppliers or employees first to keep the doors open, the IRS may still consider the failure to pay payroll taxes willful. Paying net wages to employees while failing to remit the withheld portion to the IRS is also treated as willful conduct. The courts have consistently held that a responsible person who knows taxes are unpaid and authorizes any other payment acts willfully.

Yes. The IRS can — and routinely does — assess the TFRP against every person it determines meets the responsible person and willfulness tests. In a single business, the IRS might assess the TFRP against the owner, the CFO, the controller, and a bookkeeper who all had varying degrees of financial authority. However, the IRS is entitled to collect the outstanding amount only once — it cannot recover more than 100% of the unpaid trust fund taxes across all responsible persons. In practice, the IRS pursues multiple individuals simultaneously to maximize the likelihood and speed of recovery. Each person must defend themselves independently, and the IRS is not required to pursue all responsible persons equally.

If you receive a proposed TFRP assessment via Letter 1153, you have a limited window — generally 75 days — to file a formal appeal. Your options include: (1) arguing you were not a responsible person because you lacked the requisite authority and control, (2) arguing your failure was not willful because you did not know taxes were unpaid or were prevented from paying them, (3) negotiating an installment agreement based on your personal financial situation if the assessment stands, (4) submitting an Offer in Compromise to settle for less than the full amount, or (5) requesting currently not collectible status if you cannot afford to pay and have no significant assets. Taking no action results in the assessment becoming final and the IRS beginning collection against your personal assets — bank levies, wage garnishments, and property liens. Do not ignore a Letter 1153.

No. The TFRP is generally not dischargeable in either Chapter 7 or Chapter 13 bankruptcy. Because it arises from a trust fund obligation — money withheld from employees and held in trust for the government — it is treated similarly to other trust fund taxes and survives bankruptcy entirely. This is one of the key reasons the TFRP is so dangerous: unlike many other types of personal debt and even some other tax debts, bankruptcy does not provide relief. The TFRP follows you personally regardless of the business entity's status and regardless of whether you file for personal bankruptcy. This makes an effective defense or negotiated resolution before the assessment becomes final critically important.

The closure or bankruptcy of the business does not extinguish TFRP liability. Because the penalty is assessed personally against individuals — not against the business entity — it survives the dissolution, closure, or bankruptcy of the company. The IRS can and does pursue TFRP assessments against responsible individuals long after the underlying business has ceased to exist. The IRS Revenue Officer may continue the TFRP investigation even after the business has shut down, interviewing former employees and reviewing business records. The passage of time alone does not make the TFRP go away — the IRS generally has three years from the filing date or due date of the relevant employment tax returns to assess the TFRP, and if the returns were never filed, there is no statute of limitations.

The IRS generally has three years from the date the related employment tax return (Form 941) was filed, or from its due date — whichever is later — to assess the TFRP. However, there are critical exceptions. If the employment tax return was never filed, the statute of limitations never starts running, and the IRS can assess the TFRP at any time — even decades later. Similarly, if the return was fraudulent or the IRS can show the taxpayer executed a willful attempt to evade tax, there is no time limit. This is why getting unfiled 941 returns filed is an important protective step — it starts the clock and creates a defense based on the statute of limitations. If you believe you may have exposure from unfiled payroll tax returns, addressing them proactively is essential.