Trust Fund Recovery Penalty (TFRP): Who Is Personally Liable for Unpaid Payroll Taxes, and How to Respond
Unpaid payroll taxes? Learn who the IRS holds personally liable under IRC §6672, how to appeal Letter 1153, and how to limit your exposure.
DRAFT: UNDER ATTORNEY REVIEW. This guide is a working draft posted temporarily so that Thomas F. DiLullo & Associates, P.C. can review it. It has not been approved, may contain errors, and must not be relied on as legal or tax advice. For help with your situation, schedule a confidential case evaluation or call (201) 488-0070.
Pending review by Thomas F. DiLullo, Esq., CPA, LL.M. · Draft dated October 2026
Key takeaways
If a business withholds income tax and Social Security/Medicare from employees' paychecks but doesn't send it to the IRS, the IRS can collect that money personally from any "responsible person" who acted "willfully." The authority is Internal Revenue Code §6672.
The penalty equals 100% of the unpaid trust fund taxes. A corporation or LLC doesn't shield your personal bank accounts, wages or home.
The most important deadline is usually 60 days from the date on Letter 1153. That's your window to protest to the IRS Independent Office of Appeals before the penalty is assessed.
While the business is still operating, it can designate its voluntary payments to the trust fund portion. That directly reduces what the IRS can later assess against individuals.
The TFRP can't be discharged in bankruptcy.
What are "trust fund" taxes?
When a business pays wages, it withholds two things from each paycheck: federal income tax, and the employee's share of Social Security and Medicare taxes (FICA). The law treats that money as held "in trust" for the United States (IRC §7501). It belongs to the government from the moment it is withheld.
Some taxes on a payroll tax bill are not trust fund taxes:
the employer's matching share of Social Security and Medicare;
federal unemployment tax (FUTA);
penalties and interest on the business's account.
That distinction matters because the TFRP covers only the trust fund portion. It is often well below the balance shown on the business's Form 941 notices.
Illustration. Suppose a company with $100,000 of quarterly payroll withheld $12,000 of federal income tax. The employees' share of FICA is 7.65%, or $7,650. The trust fund portion for that quarter is $19,650. The employer's matching $7,650, plus penalties and interest, stays a liability of the business only.
Errors in this calculation are common. Payments get applied to the wrong quarter, or non-trust items get included. Checking the IRS's numbers against the payroll records is one of the first things we do.
Who is a "responsible person"?
Responsibility depends on authority over the company's money, not on job title. The IRS looks at who actually had the power to decide which bills got paid (IRM 5.7.3). Common indicators:
being an officer, director or shareholder;
signing authority on business bank accounts, or actually signing checks;
authority to choose which creditors are paid and when;
signing or filing Forms 941;
control over payroll, hiring and firing;
day-to-day management of the company's finances.
More than one person can be responsible for the same quarter, and each one is liable for the full amount. The IRS can only collect the total once, though. Payments by the business or by another responsible person reduce everyone's balance.
Who usually isn't responsible. Employees who carried out instructions without independent authority to decide what got paid are usually not responsible. Clerks, payroll staff and bookkeepers often fall into this group. Unpaid, volunteer board members of tax-exempt organizations are protected by statute, but only if their role was honorary, they weren't involved in day-to-day finances, and they didn't actually know about the failure (IRC §6672(e)).
What does "willful" mean?
Willfulness doesn't require bad intent. Courts and the IRS treat the failure as willful if you knew the taxes were unpaid (or recklessly disregarded the risk) and still allowed other creditors to be paid. Paying rent, suppliers, net wages or yourself counts.
Once you learn that payroll taxes are behind, any money the business uses for something other than the IRS can support a willfulness finding. This often surprises business owners who were simply trying to keep the doors open.
People who relied in good faith on a bookkeeper or partner and had no reason to suspect a problem may have a defense, at least for the periods before they found out. The facts and the documents carry these cases.
How a TFRP investigation unfolds
A revenue officer is assigned to the business's unpaid payroll taxes. The officer identifies potentially responsible people from bank signature cards, corporate records and the returns themselves.
The Form 4180 interview. The revenue officer interviews each candidate using Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty. The answers about check-signing, who decided which bills were paid, and when you learned the taxes were unpaid often decide the case. Prepare for this interview and don't treat it as a formality. You're entitled to have a representative present.
Recommendation. If the revenue officer concludes you were responsible and willful, the IRS mails Letter 1153 with Form 2751, Proposed Assessment of Trust Fund Recovery Penalty. Signing Form 2751 means agreeing to the assessment.
Assessment and collection. If you don't respond within the deadline, the penalty is assessed against you personally. It then follows the normal collection process: notices, liens, levies and the 10-year collection period.
Your most important deadline: the Letter 1153 protest
Letter 1153 gives you 60 days from the date on the letter (75 days if it is addressed to you outside the United States) to ask for review by the IRS Independent Office of Appeals. This is usually the best chance to resolve a TFRP case, because you contest the penalty before it is assessed and without paying it first.
A formal written protest typically includes:
your name, address and taxpayer identification number;
a statement that you want to appeal to the Independent Office of Appeals;
a copy of Letter 1153, and the tax periods involved;
each item you disagree with and why. For example: you weren't responsible, you didn't act willfully, or the trust fund calculation is wrong;
supporting facts and documents;
a declaration signed under penalties of perjury, or a representative's declaration if a representative prepares it.
If you miss the deadline, the IRS will normally assess the penalty. You can still contest it afterward, but generally only by paying part of it and suing for a refund (see below). That route is slower and costs more.
Statute of limitations
The IRS generally has three years to assess the TFRP. For quarterly Forms 941, the clock starts on April 15 of the following year, because all four quarterly returns are treated as filed on that date (IRC §6501(b)(2)). For example, Forms 941 for the 2023 quarters are treated as filed April 15, 2024, so the assessment period generally runs to April 15, 2027.
Two things can extend the period:
If the IRS mails Letter 1153 before the period expires, it gets extra time to assess (IRC §6672(b)(3)).
Revenue officers often ask people to sign Form 2750, a waiver that extends the assessment period. Get advice before signing it.
Once the penalty is assessed, the IRS generally has 10 years to collect.
If the TFRP has already been assessed
Pay the "divisible" portion and sue for a refund. The TFRP is "divisible": each employee's withholding for each quarter is a separate liability. You can pay the trust fund amount for one employee for one quarter, file Form 843 to claim a refund, and then sue in federal district court or the Court of Federal Claims. The government typically counterclaims for the rest, and the court decides the whole liability. If you pay the divisible amount, file the claim, and post a bond within 30 days of notice and demand, the IRS must generally stop collecting the remainder while the case proceeds (IRC §6672(c)).
Collection alternatives. An assessed TFRP is your personal liability. It can be resolved with a payment plan, an offer in compromise, or "currently not collectible" status, like any other personal tax debt. See our guide to IRS payment plans and our offer in compromise practice.
Contribution from others. If you pay more than your share, federal law lets you sue other responsible people for contribution (IRC §6672(d)).
Track your credits. The IRS collects the trust fund total only once. Payments by the business or by other assessed individuals should reduce your balance. Check your account transcripts to make sure they do.
Limiting personal exposure while the business is still operating
Stop the balance from growing. Make current federal tax deposits first. The IRS calls continued non-payment "pyramiding." Revenue officers treat it as a serious aggravating factor, and it can lead the IRS to seek an injunction to shut the business down.
Designate voluntary payments. When the business pays the IRS voluntarily, it can direct in writing that the payment go to the trust fund portion of a specific quarter (Rev. Proc. 2002-26). That reduces the amount the IRS can assess against individuals. The designation must be made when you pay. Levy proceeds and other involuntary collections can't be designated.
Use the right business payment plan. Under the IRS's revised procedures (IRM 5.14.5, revised July 21, 2026), an operating business with trust fund balances of $25,000 or less can qualify for a Simple Payment Plan (Business Trust Fund). It must full pay by the collection statute expiration date, and no financial statement is required. If the plan is granted within 120 days of the revenue officer's case assignment, the IRS generally doesn't need to make a TFRP determination. Larger balances go through the regular business installment agreement process with a financial statement (Form 433-B).
Closing the company doesn't end the risk. The TFRP is assessed against people, not the entity. Shutting down, dissolving or selling the business doesn't stop the IRS from pursuing responsible individuals.
New Jersey and New York
Both states impose personal liability on responsible officers and employees for sales tax collected but not remitted and for state income tax withheld from wages. Their "responsible person" rules can be broader than the federal standard. New York, for example, generally imposes sales-tax liability on responsible officers whether or not the failure was willful.
A business behind on federal payroll taxes is often behind on state trust fund taxes too, so plan the defense for both together. See our New Jersey sales tax audit defense page.
How we approach TFRP cases
Our firm pairs tax attorneys with CPA-level accounting. A typical TFRP case involves:
rebuilding the trust fund numbers from payroll records, bank statements and IRS account transcripts. The proposed amount is often overstated because payments were misapplied or non-trust items were included;
preparing you for the Form 4180 interview and attending it with you;
writing the Letter 1153 protest and presenting it to the Independent Office of Appeals;
sorting out the company's own liability: deposits, designations, a business payment plan or an offer. This keeps the personal exposure from growing;
litigation when Appeals can't resolve the case. Our team includes a former IRS District Counsel trial attorney.
Frequently asked questions
Can the IRS take my house to collect my company's payroll taxes? Once the TFRP is assessed against you, it is your personal tax debt. A federal tax lien attaches to your property, including your share of real estate. The IRS can't levy on your principal residence without first getting approval from a federal district court (IRC §6334(e)(1)). In practice, a payment plan, an offer or a successful appeal usually resolves the case well before that point. See our federal tax lien guide.
Does an LLC or corporation protect me from the TFRP? No. The penalty is imposed on persons who were responsible and acted willfully, whatever the business entity.
Can I get rid of the TFRP in bankruptcy? No. Trust fund taxes are among the tax debts bankruptcy can't discharge. See our tax debt and bankruptcy guide.
Two of us were assessed for the same quarters. Will the IRS collect twice? No. Each responsible person is liable for the full amount, but the IRS collects the trust fund total only once. Make sure every payment by the business or the other person shows up as a credit on your account.
Do I have to sit for the Form 4180 interview? The revenue officer will ask for an interview, and the IRS can issue a summons for testimony and records if needed. Declining rarely helps. Preparing carefully, with a representative present, almost always does.
How long can the IRS collect an assessed TFRP? Generally 10 years from the assessment date. Certain events, such as an offer in compromise, a bankruptcy or a Collection Due Process hearing, extend that period.
Sources
Internal Revenue Code §§6672, 7501, 6501(b)(2), 6334(e)(1); 11 U.S.C. §507(a)(8)(C)
Internal Revenue Manual 5.7.3 (Establishing Responsibility and Willfulness for the TFRP) and 5.7.4 (Investigation and Recommendation of the TFRP)
IRM 5.14.5, Simple Payment Plans and Guaranteed Installment Agreements (rev. July 21, 2026)
Rev. Proc. 2002-26 (designation of voluntary payments)
IRS Publication 5, Your Appeal Rights and How to Prepare a Protest
Facing a Letter 1153 or a Form 4180 interview? The 60-day protest window is short. Schedule a confidential case evaluation or call (201) 488-0070.
This guide is general information, not legal advice for your situation. Reading it doesn't create an attorney-client relationship.
DRAFT: UNDER ATTORNEY REVIEW. This guide is a working draft posted temporarily so that Thomas F. DiLullo & Associates, P.C. can review it. It has not been approved, may contain errors, and must not be relied on as legal or tax advice. For help with your situation, schedule a confidential case evaluation or call (201) 488-0070.
