Can the IRS Go After Me for My Company’s Payroll Tax Debt?

Running a business means taking responsibility for more than just operations and profits. One of the most critical financial obligations is managing payroll taxes, which include withheld amounts for income tax, Social Security, and Medicare. These taxes aren’t company funds—they are held in trust for the federal government. When a business fails to pay them, serious legal consequences can follow.

The Internal Revenue Service (IRS) can collect these unpaid taxes directly from individuals it deems responsible. This includes business owners, officers, bookkeepers, and anyone controlling payroll decisions. The IRS can assign personal liability for trust fund taxes using the Trust Fund Recovery Penalty (TFRP) tool. In these cases, the protections typically provided by corporations or LLCs may no longer apply.

Many business leaders are surprised to learn that their assets—such as bank accounts or property—could be at risk. The IRS may hold someone liable if they have the authority to pay taxes but fail to do so. This article will explain payroll and trust fund taxes, how the IRS determines liability, and what steps you can take to protect yourself. We will also discuss the IRS enforcement actions, your right to appeal, and the available relief options if you've fallen victim.

What Are Payroll Taxes and Trust Fund Taxes in Employment Tax Law?

Businesses that hire employees must collect and submit specific taxes governed by the federal tax code. These payroll taxes fund key programs such as Social Security, Medicare, and federal unemployment insurance. If a business fails to meet these obligations, the Internal Revenue Service (IRS) may assess penalties and, in some cases, pursue individuals personally for the unpaid taxes.

What Are Payroll Taxes?

Payroll taxes fall into two primary categories: employee withholdings and employer contributions.

• Employee Withholdings
  Employers must withhold several taxes from their employees' paychecks. These include the employee’s federal income tax, the Social Security tax, and the Medicare tax, including the Additional Medicare Tax for high-income earners.
  
  
• Employer Contributions
  Businesses are also responsible for paying separate taxes as employers. These include the employer’s share of Social Security and Medicare taxes, the Federal Unemployment Tax (FUTA), and any applicable state or local payroll taxes.

What Are Trust Fund Taxes?

Trust fund taxes refer to the withheld portions of payroll taxes that must be submitted to the IRS. These taxes do not belong to the business and are held in trust for the federal government, as outlined in Internal Revenue Code Section 7501. Trust fund taxes include the federal income tax withheld from employees and the employee’s share of Social Security and Medicare taxes. Taxes paid directly by the employer, including FUTA and the employer’s portion of FICA, are not classified as trust fund taxes.

Why the IRS Enforces Collection

The IRS aggressively pursues trust fund recovery because these taxes are government property. Businesses that fail to pay may face enforcement through the Trust Fund Recovery Penalty (TFRP).

What Is the Trust Fund Recovery Penalty (TFRP) for Unpaid Income Tax and Social Security Withholdings?

The Trust Fund Recovery Penalty (TFRP) is a serious enforcement tool the Internal Revenue Service (IRS) uses to collect unpaid payroll taxes from individuals. It allows the IRS to assign personal liability when a business fails to remit trust fund taxes, which include federal income tax, Social Security, and Medicare taxes withheld from employees’ wages.

Legal Basis and Intent

The TFRP is authorized under Internal Revenue Code Section 6672. This law authorizes the IRS to hold any individual responsible for collecting, accounting for, or paying trust fund taxes personally liable if they willfully fail to perform these duties. The penalty bypasses corporate protection to recover funds owed to the federal government.

The TFRP serves three primary purposes:

• The goal is to safeguard the tax withholdings from employees owed to the government.
  
  
• It is crucial to prioritize the payment of taxes by responsible individuals.
  
  
• It aims to collect taxes even when a business cannot make payments.

How the Penalty Is Calculated

The TFRP amount equals 100% of the employment taxes' unpaid trust fund portion. This includes:

• This amount includes the federal income tax that is withheld from employee paychecks.
  
  
• The employee bears their fair share of Social Security and Medicare taxes, encompassing any supplementary Medicare Tax.

The penalty does not cover the employer’s portion of FICA taxes, FUTA tax, or accrued interest and penalties.

Consequences of Assessment

Once assessed, the TFRP becomes a personal tax liability. The IRS can collect the debt through tax liens, levies, wage garnishments, or seizure of personal assets. The agency does not need to exhaust business remedies before pursuing individuals directly.

Who Pays Payroll Taxes and Can Be Held Personally Liable?

The Internal Revenue Service (IRS) can hold individuals personally liable for unpaid payroll taxes through the Trust Fund Recovery Penalty (TFRP). Liability is not limited to business owners. Instead, it applies to anyone with the responsibility and authority to collect, account for, and remit trust fund taxes to the federal government. This individual is known as a “responsible person.”

Who Is Considered a Responsible Person?

A responsible person has significant control over business finances or payroll operations. The IRS evaluates actual authority rather than job titles or ownership percentage. The following individuals may be considered responsible:

• Corporate officers and directors: Those with financial control or check-signing authority may be held liable, even if they do not own the business.
  
  
• Owners and managing members: Individuals in control positions in corporations, LLCs, or sole proprietorships are frequently liable for employment taxes.
  
  
• Payroll and accounting staff: Employees who process payroll or authorize tax payments may qualify if they have decision-making power.
  
  
• Partners in partnerships: General partners are especially vulnerable if they can access business funds and control financial decisions.
  
  
• Third-party providers: Payroll services, PEOs, or external accountants may face liability if they control the disbursement of payroll taxes.
  
  
• Nonprofit board members or trustees: Individuals with fiscal authority in nonprofits can also be responsible under certain circumstances.

IRS Criteria for Determining Responsibility

The IRS examines several factors to determine if someone is a responsible person:

• The ability to sign checks or authorize payments
  
  
• Must have control over their payroll, bank accounts, and the payment of bills
  
  
• File Form 941 and other payroll returns
  
  
• Power to decide which bills or creditors are paid

Why Function Matters More Than Title

Being listed as an officer is not enough. The IRS looks at actual involvement in financial management. Individuals without formal titles can be liable if they exercise control over funds. Conversely, someone with a title but no absolute authority may not be held responsible. Understanding this distinction is essential to limiting exposure to personal tax liability under the tax code.

What Counts as ‘Willful’ Failure to Payroll and Income Tax Liability?

To impose the Trust Fund Recovery Penalty (TFRP), the IRS must show that the responsible person had authority and willfully failed to pay trust fund taxes. In this context, “willful” does not mean malicious intent. Instead, it refers to any voluntary, knowing, or reckless disregard of a legal obligation to pay withheld payroll taxes to the federal government.

Key Indicators of Willful Conduct

• Paying Other Creditors First: Using business funds to pay vendors, rent, or suppliers instead of paying trust fund taxes is treated as a willful act. The IRS considers this a conscious decision to prioritize other expenses over required tax payments.
  
  
• Paying Net Wages While Taxes Are Unpaid: If a business pays employees their net wages but does not remit the withheld federal taxes, the IRS views this as a willful failure. This shows a decision to keep the business running while ignoring tax obligations.
  
  
• Ignoring IRS Notices or Tax Delinquencies: Awareness of unpaid employment taxes and failure to act—such as not investigating, escalating, or correcting the issue—can be sufficient to establish willfulness.
  
  
• Reckless Disregard: A person can be found willful even without specific knowledge if they recklessly failed to monitor payroll tax compliance. Delegating responsibility without oversight is often cited as reckless behavior.

Why Good Intentions Are Not a Defense

The IRS does not need to prove intent to defraud. You may be personally liable if you knew—or should have known—that trust fund taxes were unpaid and failed to take appropriate action. Courts rarely accept financial hardship or limited involvement as valid defenses.

IRS Collection Tools for Payroll Tax Debts

When a business fails to pay its payroll taxes, the Internal Revenue Service (IRS) has powerful tools to collect the debt. The company itself is not the only target of these enforcement actions. If the Trust Fund Recovery Penalty (TFRP) has been assessed, the IRS can also pursue personal assets of responsible individuals. The IRS typically begins with administrative actions, meaning they do not need a court order to start collecting unpaid taxes. Below are the most common collection methods:

IRS Collection Methods

• Tax Liens: A federal tax lien is a legal claim against all your property, including real estate, vehicles, and financial accounts. It may affect your credit and limit your ability to sell or refinance assets.
  
  
• Bank Levies: The IRS can seize funds directly from business or personal bank accounts. This usually follows a notice, a payment demand, and a failure to respond.
  
  
• Wage Garnishments: The IRS may garnish wages from a business owner's or a responsible person’s paycheck. State laws on wage exemptions do not limit the IRS, unlike typical creditors.
  
  
• Asset Seizures: In severe cases, the IRS may seize and sell physical assets such as equipment, vehicles, or real estate to satisfy the tax debt.

Enforcement Timeline and Statute of Limitations

The IRS generally has 10 years from the assessment date to collect payroll tax debts, including those imposed under the TFRP. However, filing an appeal, entering into certain agreements, or filing for bankruptcy may extend this period. Understanding these collection tools is essential for anyone facing federal tax enforcement.

How Business Structure Affects Personal Liability for Federal Unemployment Tax and Trust Fund Debts

Many business owners assume that forming a corporation or limited liability company (LLC) protects them from all personal responsibility for business debts. While that protection generally applies to contracts and loans, it does not shield individuals from liability for unpaid payroll taxes. The IRS can hold responsible individuals personally liable through the Trust Fund Recovery Penalty (TFRP), regardless of business structure.

How Different Structures Affect Liability

• Sole Proprietorships: The owner is personally responsible for all business obligations, including employment taxes. There is no legal separation between the individual and the business.
  
  
• Partnerships: General partners are typically personally liable for all business debts. Even limited partners may face exposure if involved in financial decisions or payroll operations.
  
  
• Corporations: While corporations offer limited liability for most debts, this protection does not apply to trust fund taxes. The TFRP holds officers, directors, and others who control payroll decisions liable.
  
  
• Limited Liability Companies (LLCs): While LLCs provide similar protection to corporations, they still expose managing members and anyone with financial control to personal liability for payroll tax debts.
  
  
• Professional Employer Organizations (PEOs): These third-party providers may assume responsibility for payroll, but the IRS may still pursue the business owner or other responsible internal parties if taxes are not paid.

Why the Corporate Veil Won’t Help

The TFRP does not require the IRS to “pierce the corporate veil.” It is a statutory remedy that imposes liability on individuals who control payroll and trust fund taxes. This makes business structure irrelevant if you meet the criteria for responsibility and willfulness.

How to Protect Yourself from Personal Liability

If you have a role in managing payroll or business finances, understanding how to reduce your risk of personal liability for unpaid payroll taxes is essential. The Internal Revenue Service (IRS) focuses on control and behavior—not just titles—when applying the Trust Fund Recovery Penalty (TFRP). Taking specific precautions can help protect you from becoming personally responsible for employment tax obligations.

Best Practices to Reduce Exposure

• Maintain Clear Corporate Formalities: Keep accurate corporate records, conduct regular meetings, and avoid mixing personal and business funds. These practices help support the legitimacy of the business structure.
  
  
• Establish Strong Financial Controls: Use written protocols to approve payments, verify tax deposits, and track due dates. Controls should require dual authorization for outgoing payments and regular payroll tax audits.
  
  
• Prioritize Payroll Tax Payments: Always fund tax deposits first before paying other business expenses. The IRS views paying other creditors ahead of the government as a willful act if taxes are unpaid.
  
  
• Limit Your Financial Authority if Appropriate: If you’re not responsible for tax compliance, do not sign checks, access payroll systems, or approve disbursements. The less control you exercise, the less likely you’ll be responsible.
  
  
• Use Trusted Payroll Services with Caution: Third-party services can help ensure accuracy, but the IRS still holds the business—and potentially you—responsible if those taxes go unpaid.
  
  
• Consult a Qualified Tax Professional: Work with an experienced tax advisor to ensure your procedures align with federal tax law and reduce your risk of triggering personal liability.

Why Proactive Steps Matter

Even well-intentioned individuals can face IRS enforcement if processes are lacking. Protecting yourself starts with clear roles, documented systems, and a focus on compliance.

What to Expect in the IRS TFRP Assessment Process

Once the Internal Revenue Service (IRS) begins investigating unpaid trust fund taxes, individuals who controlled payroll finances may become targets of a Trust Fund Recovery Penalty (TFRP) assessment. Understanding how the process works can help you respond appropriately and protect your rights. Here is what to expect during the assessment phase:

IRS TFRP Assessment Steps

1. Initial Investigation: The IRS will review payroll records, Form 941 filings, and business bank activity. Revenue officers may interview employees and officers to determine who controlled financial decisions.
   
   
2. Identification of Responsible Persons: Based on its findings, the IRS identifies individuals who meet the definition of a “responsible person.” This includes anyone with the authority to direct payments or manage payroll.
   
   
3. Determination of Willfulness: The IRS will assess whether the failure to pay taxes was willful, meaning that the person either knowingly failed to pay or recklessly disregarded their obligation.
   
   
4. Issuance of Letter 1153: If the IRS believes a penalty is warranted, it will issue Letter 1153 proposing the TFRP assessment. You have 60 days (or 75 if you are outside the U.S.) to respond.
   
   
5. Appeals Process: You may request a hearing with the IRS Independent Office of Appeals. This is often your last opportunity to avoid assessment before collection begins.
   
   
6. Final Assessment and Collection: If the appeal is unsuccessful or not requested, the IRS formally assesses the penalty and may begin collection through liens, levies, or garnishments.

Being informed about this process helps ensure timely responses and the opportunity to present a proper defense. Professional guidance is recommended at each stage.

Payment and Relief Options If You’re Liable, Including Tax Credits and Installment Agreements

If you’ve been assessed the Trust Fund Recovery Penalty (TFRP) and are now personally liable for unpaid payroll taxes, you still have several options to manage or resolve the debt. The Internal Revenue Service (IRS) offers a range of payment plans and hardship relief programs. Choosing the right strategy depends on your financial condition and the amount owed.

IRS Relief and Payment Options

• Installment Agreements: You may qualify for a monthly payment plan for liabilities between $10,000 and $25,000, including the In-Business Trust Fund Express Installment Agreement. These agreements allow you to avoid aggressive collection actions while paying over time.
  
  
• Offer in Compromise (OIC): Sometimes, the IRS may accept less than the full amount owed if you prove that paying in full would cause undue financial hardship. However, trust fund taxes are closely scrutinized, and approval is limited.
  
  
• Currently Not Collectible (CNC) Status: If paying the debt prevents you from meeting basic living expenses, you may qualify for CNC status. This temporarily suspends collection but does not eliminate the debt.
  
  
• Innocent Spouse Relief: In rare situations, spouses who were not involved in the business and had no knowledge of the tax issue may seek relief from liability.
  
  
• Bankruptcy Considerations: Most payroll tax liabilities, including the TFRP, are not discharged in bankruptcy. However, filing may protect IRS collection while you reorganize your finances.

Each of these options involves specific eligibility criteria and documentation. Consulting a qualified tax professional is strongly recommended before pursuing relief.

Frequently Asked Questions

Can the IRS take my assets for payroll tax debt related to my business?

If the IRS assesses the Trust Fund Recovery Penalty (TFRP), it can seize personal assets to recover trust fund tax debts. These taxes help fund social programs and are considered government property. The penalty applies even if both the employer and the payroll service failed. The IRS may collect based on your earnings, savings, or property.

What is considered a “responsible person” under IRS rules?

A “responsible person” pays payroll taxes or controls payroll decisions. This includes owners, officers, or staff with access to business funds. The IRS reviews who determines which creditors to pay each period. If you had the authority during the pay period, you could be liable—even if you were unaware of missed payments.

How do I know if I’ve been assessed the Trust Fund Recovery Penalty?

You’ll receive IRS Letter 1153, which arrives by mail and includes a detailed explanation of the proposed penalty. The letter contains a page outlining your appeal rights, a note on deadlines, and the balance due. The penalty is based on a calculation of unpaid taxes from Form 941, which you should review carefully.

Can using a payroll service protect me from liability?

Not fully. While payroll services assist with tax calculation, filing, and deposits, the IRS holds the business and its responsible persons accountable. Even if the service fails, you must monitor filings and report issues. Taxpayers remain responsible for confirming payments each pay period, especially if the employer and provider are involved.

Is there a way to appeal a TFRP assessment?

You may appeal by submitting documentation that shows you were not responsible for the unpaid taxes. Include copies of relevant deductions, internal memos, or financial logs. The IRS will report the decision after reviewing your case. Always request confirmation and note any appeal deadlines listed in Letter 1153 to preserve your rights.

Does forming an LLC protect me from personal liability for payroll taxes?

An LLC may protect you from contracts or vendor debts, but not from the burden of unpaid payroll taxes. The IRS focuses on financial control, not entity type. Even with standard deduction advantages or married filing status, your refund or assets can still be used to satisfy TFRP liability if you're deemed responsible.