If your business has employees, you’re responsible for withholding and sending their payroll taxes to the IRS: things like income tax, Social Security, and Medicare. These withholdings are called “trust fund taxes” because the business holds them in trust for the U.S. government.
But if those taxes aren’t paid, the IRS doesn’t just come after the company. They can come after you personally.
That’s where the Trust Fund Recovery Penalty (TFRP) cones in. It’s one of the IRS’s most serious enforcement tools.
What are “Trust Fund” Taxes?
Every paycheck you issue includes taxes withheld from employees for:
- Federal income tax
- Social Security (FICA)
- Medicare
These funds don’t belong to the business – they’re held in trust until paid to the IRS.
When a business uses those funds for other expenses, delays payment, or fails to remit them, the IRS views it as a breach of trust.
What is TFRP?
The IRS can hold individuals personally liable for the unpaid trust fund portion of payroll taxes. This penalty is equal to 100% of the unpaid tax amount.
So, if your company failed to deposit $50,000 in withheld payroll taxes, you personally could owe $50,000 – even if you never received any of that money. (IRS TFRP Overview)
Who can be held personally responsible?
The IRS can assess the penalty against any “responsible person” who:
- Had authority over financial decisions
- Knew (or should have known) taxes weren’t paid
- Willfully allowed nonpayment
This can include owners, officers and directors, CFOs or account managers, bookkeepers or payroll administrators with signature authority.
You don’t have to be the business owner to be held liable. If you had the power to pay but chose not to, the IRS may assess the penalty against you.
How the IRS investigates
Before assessing the penalty, the IRS will:
- Conduct interviews and review company records.
- Ask the parties responsible to complete Form 4180: Report of Interview with Individual Relative to Trust Fund Recovery Penalty.
- Issue Letter 1153, notifying you of the proposed penalty and your right to appeal.
If you ignore the notice or lose the appeal, the IRS will assess the penalty and begin collection through levies, liens, and wage garnishments if necessary.
Why it’s so serious
TFRP is one of the few IRS debts that cannot be discharged in bankruptcy. Once assessed, it follows you personally and even if the business closes.
How to protect yourself
If you’ve received a letter about unpaid trust fund taxes or a Form 4180 interview request:
- Do not ignore it. The timeline for response is limited.
- Consult a tax attorney immediately. Statements made to the IRS can determine your liability.
- Gather documentation showing your role, authority, and involvement in payments.
Even if the taxes are the company’s responsibility, you need to show that you were not the person willfully responsible.
How McClure & Stewart can help
At McClure & Stewart, we help clients facing TFRP investigations and assessments.
Our attorneys:
- Represent you in IRS interviews and correspondence
- Present legal defenses and mitigating evidence
- Negotiate payment plans or appeals where necessary
- Work to limit or remove personal liability wherever possible
The sooner we’re involved, the better your chances of protecting your personal assets.
Conclusion
TFRP can turn a business tax problem into a personal financial crisis, but you have rights and defenses.
If you’ve received notice of a trust fund investigation or penalty, contact McClure & Stewart today. Our team understands these complex cases and can help you navigate every step of the process.
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