The Trust Fund Recovery Penalty (TFRP) is one of the IRS’s most powerful enforcement tools for collecting unpaid payroll taxes. It allows the agency to hold individuals personally liable—not just the business—when withheld taxes are not submitted to the government.
Under Internal Revenue Code Section 6672, the penalty applies to income tax withholdings and the employee’s share of Social Security and Medicare taxes. These amounts are called trust fund taxes because they are withheld from employees and held “in trust” by the employer until paid to the IRS. When these funds are misused or unpaid, the IRS may pursue individuals with financial control over tax decisions.
The TFRP is sometimes called the “100 percent penalty” because the IRS can collect the full unpaid trust fund amount from each responsible person. Those who authorize payments, manage payroll, or control company funds can be at risk—even without an executive title. This guide explains trust fund taxes, who can be held liable, how the IRS conducts investigations, and what defenses or appeal rights are available. Understanding the Trust Fund Recovery Penalty is critical for anyone involved in financial operations or business decision-making.
Trust fund taxes are employment taxes that businesses must withhold from employees’ wages and hold for the federal government. Under Internal Revenue Code Section 7501, these funds include federal income tax withheld from pay. Participation in submitting tax returns or making tax deposits is also required. Medicare taxes (FICA). The IRS treats these withheld amounts as being held “in trust” by the employer.
From a legal standpoint, these taxes never belong to the employer. They are collected from employees and are supposed to be deposited with the IRS according to a schedule. When an employer fails to pay these funds, the government considers it a misuse of someone else’s money—specifically, money that belongs to the United States Treasury.
It’s important to understand what is not included in trust fund taxes. The employer’s share of FICA taxes, while still a payroll obligation, is not treated as a trust fund amount. Therefore, only the employee-withheld portion is subject to the Trust Fund Recovery Penalty (TFRP) if unpaid.
The employer acts as a fiduciary by collecting and holding these taxes. If the taxes are diverted or unpaid, the IRS considers it a violation of federal tax law. Such behavior can result in personal liability for individuals with control over tax decisions.
Understanding the components of trust fund taxes is essential for business owners, officers, and financial staff. Mishandling these funds—whether through delay, oversight, or willful decision—can trigger aggressive IRS action. The TFRP is designed to ensure accountability when trust obligations are ignored.
The Trust Fund Recovery Penalty (TFRP) is an enforcement tool the IRS uses to collect unpaid trust fund taxes. It applies when a business fails to remit taxes withheld from employees, such as income tax and the employee portion of Social Security and Medicare (FICA) taxes. These funds are considered to be held “in trust” for the federal government.
Under Internal Revenue Code Section 6672, the IRS can hold certain individuals personally liable for the unpaid amount. This penalty is often called the “100 percent penalty” because the person assessed becomes responsible for the balance owed. It does not double the tax—it simply shifts full liability from the business to an individual.
The purpose of the TFRP is to ensure accountability. The IRS views withholding taxes to cover other expenses, like vendor payments or operational costs, as a misuse of government funds. The TFRP allows the agency to recover the money from anyone with control over financial decisions.
While Form 941 (Employer’s Quarterly Federal Tax Return) is the most common source of unpaid trust fund liabilities, other forms may also trigger the penalty:
Once the IRS identifies a delinquency, it can begin a TFRP investigation. If certain conditions are met, the IRS can assess the penalty directly against one or more responsible persons, regardless of the business’s ability to pay.
The Trust Fund Recovery Penalty (TFRP) doesn’t apply only to business owners. The IRS can hold any individual personally liable if they have the authority and duty to ensure trust fund taxes are collected and paid. Liability applies when that individual willfully fails to carry out this responsibility. This includes individuals who controlled finances, authorized payments, or made decisions about tax obligations.
Under Internal Revenue Code Section 6672, a “responsible person” is defined by actions, not titles. The IRS focuses on those who have the power to control company funds and choose how those funds are used.
Examples of potentially liable individuals include:
The IRS uses several factors to determine responsibility:
The IRS can collect the full balance from any one of several liable individuals.
Clerical employees who follow instructions without independent control are usually not liable. However, someone who acts independently—such as delaying tax payments or choosing vendors over the IRS—can be held responsible.
You could be at risk if you direct payments or oversee financial operations.
To assess the Trust Fund Recovery Penalty (TFRP), the IRS must prove two things: the individual was responsible and willfully failed to collect, account for, or pay withheld payroll taxes. Willfulness does not mean intent to defraud or break the law—the person knew the taxes were due and chose not to pay them.
According to IRS guidance, willfulness involves a voluntary, intentional act. If a person in a position of authority chooses to pay other business expenses—such as vendors or rent—instead of the IRS, this satisfies the willfulness requirement.
Examples of willful conduct include:
Willfulness also includes reckless disregard. If someone could ensure compliance but failed to verify whether taxes were paid, the IRS may still consider the conduct willful.
Importantly, financial hardship is not a defense. Keeping a business running by paying others instead of submitting withheld taxes still meets the legal threshold.
The IRS can impose personal liability under the TFRP if both responsibility and willfulness are present.
Understanding how the IRS defines willfulness helps clarify the serious obligations of anyone who controls or influences tax payments. Taking proactive steps, especially after receiving warnings, is essential to avoid liability.
When the IRS suspects that a business has failed to deposit trust fund taxes, it begins an investigation to determine if the Trust Fund Recovery Penalty (TFRP) applies. This process identifies individuals with authority, financial duties, and decision-making power over tax payments.
A revenue officer leads the investigation and reviews the company’s financial records, payroll history, and prior tax filings. The goal is to determine if an individual with responsibility also willfully failed to meet their tax obligations.
The central tool used in this process is Form 4180, the Report of Interview with Individual Relative to Trust Fund Recovery Penalty. This interview is a formal part of the investigation. It helps the IRS evaluate whether an individual had a controlling role in the company’s tax decisions.
Form 4180 covers:
The IRS may interview several people and request supporting documentation such as bank records, internal emails, or board meeting notes. All findings are compiled into a final report used to determine liability. If the IRS concludes that both responsibility and willfulness are present, it proceeds to the assessment phase, starting with Letter 1153 and Form 2751.
The Form 4180 interview is a crucial step. It becomes part of the IRS’s official record and may be used to justify a personal penalty under the TFRP. Anyone contacted for an interview should take it seriously and prepare thoroughly.
After completing its investigation, the IRS begins the formal assessment phase of the Trust Fund Recovery Penalty (TFRP) by mailing Letter 1153 to the identified individual. This letter notifies the person of the proposed penalty and explains their right to appeal the IRS’s determination.
The IRS sends Letter 1153 certified mail to the taxpayer's last known address. The recipient has 60 days to respond (75 days if located outside the U.S.). If the IRS does not receive a response by the deadline, it may assess the penalty and initiate collection activity without further notice.
Form 2751, the Proposed Assessment of Trust Fund Recovery Penalty, accompanies the letter. This form provides a detailed breakdown of unpaid amounts by tax period, allowing the recipient to agree with the assessment or formally dispute it.
To avoid assessment, the individual must submit a complete response before the deadline. The response should include:
This appeal may stop the assessment and trigger a formal review process. Failing to respond means the IRS can move forward and treat the penalty as a personal debt, subject to collection actions such as liens or levies.
This step is a critical turning point. Letter 1153 and Form 2751 are the taxpayer’s final opportunity to challenge the IRS’s report before the penalty becomes final. Missing the response date or submitting incomplete information may have lasting financial and legal consequences.
If you receive Letter 1153 from the IRS and disagree with the proposed Trust Fund Recovery Penalty (TFRP), you can file an appeal before the penalty is officially assessed. This is your final chance to contest the IRS’s determination through administrative channels.
You must respond within 60 days from the date of the letter (or 75 days if it was mailed to an address outside the United States). If you fail to respond promptly, the IRS may assess a penalty and begin collection.
There are two types of appeals:
A small case request must include:
A formal protest must also include:
Once your appeal is submitted, the IRS Appeals Office will review the case independently. They may offer a resolution based on unclear facts, litigation risk, or shared obligations.
To safeguard your rights, send your appeal by certified mail, keep a copy, and ensure it reaches the deadline. A clear, complete submission gives you the best chance to challenge the proposed penalty successfully.
If you fail to respond to Letter 1153 or your appeal is denied, the IRS will assess the Trust Fund Recovery Penalty (TFRP) and may begin collection. However, you still have legal rights and procedural protections even after assessment. One of the most important is your right to a Collection Due Process (CDP) hearing under IRC Section 6330. Before the IRS can seize your property, levy your wages, or freeze your financial institution accounts, it must issue a Final Notice of Intent to Levy. You have 30 days from the date of this notice to request a CDP hearing with the IRS Office of Appeals.
During the CDP hearing, you may:
Another option is filing a refund claim under IRC Section 6672(c). To do this, you must:
You may file a lawsuit in federal court if your claim is denied. This gives you access to judicial review but requires upfront payment and legal preparation.
Once assessed, the TFRP becomes a personal obligation. The IRS may issue levies, file liens, or pursue other enforced collection methods. Interest and penalties continue to accrue until the balance is paid, settled, or legally resolved.
Avoiding the Trust Fund Recovery Penalty (TFRP) begins with understanding your role and fulfilling all tax-related obligations. Anyone with financial authority in a business must ensure that withheld taxes are correctly reported and paid to the IRS on time.
The IRS expects business owners and financial staff to take an active role in monitoring payroll tax compliance. Delegating tax duties does not remove personal responsibility, especially if you can detect or prevent errors.
To reduce exposure to the TFRP, the IRS recommends these best practices:
Businesses should have internal controls in place that support proper reporting and payment. Ensure that you make deposits and don't miss any IRS communications.
The IRS will assess the TFRP if it determines someone had control over funds but failed to meet their obligations. Prevention depends on visibility, oversight, and proactive action.
A reliable system, proper documentation, and regular review of tax activity can help avoid costly mistakes and personal liability.
The Trust Fund Recovery Penalty (TFRP) applies to individuals who control employment tax obligations, even within LLCs or when using third-party payroll providers. The IRS evaluates position, control, and financial authority—not just titles or business structure.
For LLCs, liability depends on the company’s tax classification:
Even if state law limits personal liability, federal law overrides it. The IRS assesses responsibility by examining access to funds, payment control, and decision-making authority.
Outsourcing does not remove accountability for businesses using Payroll Service Providers (PSPs) or Professional Employer Organizations (PEOs). The client company is still responsible for confirming that all payroll tax requirements are met.
The IRS evaluates:
To avoid exposure, businesses should monitor all third-party arrangements and maintain oversight of tax deposits and filings. The IRS will assess the TFRP if it finds someone had authority and failed to act.
Understanding these risks helps prevent costly errors and reinforces the need for active compliance—even when duties are delegated.
The IRS must assess the Trust Fund Recovery Penalty (TFRP) within a limited period defined by law. Under Internal Revenue Code Section 6501, the standard statute of limitations is three years from the later of two dates: the return’s due date or the actual date the return was filed.
If employment tax returns such as Form 941 are filed on time, the assessment period begins on the filing deadline. If filed late, the period starts on the actual filing date. IRC Section 6501(b)(2) sets a presumptive filing date of April 15 of the following year for certain returns, unless another record proves otherwise.
Sometimes, the IRS may ask the taxpayer to extend the statute by signing Form 2750. This support document waives the three-year limit and gives the IRS more time to complete its investigation.
Once the statute expires, the IRS loses the legal ability to assess the penalty. Therefore, taxpayers must monitor mail dates, return filings, and IRS notices to ensure timely responses and protect against late assessments. Tracking these obligations is key to maintaining procedural rights in any TFRP matter.
The Trust Fund Recovery Penalty (TFRP) allows the IRS to hold individuals personally liable for unpaid payroll taxes. It targets those in charge of financial decisions who neglected to submit withheld taxes. Choosing other payments over tax obligations can trigger liability even without intent to deceive.
Understanding the legal standards of responsibility and willfulness is essential. The IRS looks at actual control, not just job titles. Should you receive Letter 1153, please take prompt action. Appeals, refund claims, and Collection Due Process hearings may offer relief if the penalty hasn’t been assessed.
Prevention remains the best defense. Businesses should monitor payroll tax deposits, enforce internal controls, and respond promptly to IRS notices. By staying informed and involved, responsible persons can reduce exposure and meet legal obligations. Taking action early can protect your business and finances from long-term consequences.
The TFRP is a penalty the IRS assesses against individuals who fail to collect, account for, and pay withheld payroll taxes. It applies when the trust fund portion of employment taxes is not remitted. By law, this includes income tax and the employee’s Social Security and Medicare share. A complete definition is available on the IRS’s TFRP reference page.
The IRS focuses on financial authority, access to funds, and actual control. Users who approve payroll, sign checks, or permit payments to other creditors may be considered responsible. This determination does not depend solely on job title. Instead, it depends on how your relationships within the business affect decision-making and financial obligations.
Treat it seriously. It’s likely your first time encountering this situation. Consult with a tax professional. You must respond within 60 days (75 if abroad) and include a signed statement, supporting records, and a reference to your role. Failing to act by the deadline allows the IRS to create the assessment and proceed with collection.
Yes, but only if you lacked authority or knowledge. The IRS considers whether you could intervene and didn’t. A claim based on lack of awareness must be backed by evidence of limited duties. Prior notices, warnings, or IRS initiatives to inform personnel may weigh against you if you previously ignored them.
No, while PSPs or PEOs handle tax tasks, the employer remains responsible. You must visit IRS transcripts, monitor deposits, and act if any problems arise. If the third party fails to comply, it may still pertain to your liability unless you can prove you acted promptly after being prompted by IRS warnings.
The IRS generally has three years from the later of the tax return’s due date or filing date to assess liabilities. This statute may be extended by filing Form 2750. Employers should maintain thorough records, including return copies and certified mail receipts, to substantiate corrections, support defenses, or demonstrate compliance if disputes later arise.
Ignoring Letter 1153 authorizes the IRS to assess the penalty and begin enforced collection actions. Consequences may include damage to personal finances, federal tax liens, or a levy on a financial institution. Failing to respond eliminates the chance to contest the penalty or negotiate alternatives before the assessment becomes final and enforceable.
Schedule your free, confidential tax relief review today.
Copyright © 2025 Get Tax Relief Now
