Trust Fund Recovery Penalty: Personal Liability for Business Payroll Taxes
The Trust Fund Recovery Penalty is one of the most aggressive tools in the IRS arsenal. It pierces the corporate veil and makes individuals personally responsible for a business's unpaid payroll taxes — and it is not dischargeable in bankruptcy.
What Is the Trust Fund Recovery Penalty?
Under IRC Section 6672, the IRS can assess the Trust Fund Recovery Penalty (TFRP) against any individual who was a 'responsible person' who 'willfully' failed to remit the employee portion of payroll taxes (withheld income taxes, Social Security, and Medicare). The penalty equals 100% of the unpaid trust fund taxes.
Who Is a 'Responsible Person'?
A responsible person is anyone with authority over a company's financial decisions, including: owners, officers (president, VP, treasurer), bookkeepers with check-signing authority, controllers, board members, and in some cases majority shareholders. The IRS looks at who controlled the finances, not just who had the title.
What 'Willful' Means
Willfulness does not require intent to defraud. The IRS defines willfulness as knowing about the tax obligation and either intentionally failing to pay or taking a reckless disregard of the requirement. Using business funds to pay other creditors when payroll taxes are due is considered willful.
How the IRS Investigates TFRP
When a Revenue Officer is assigned to a payroll tax case, they investigate all potentially responsible persons using Form 4180 (Report of Interview). They examine who signed checks, who had bank signature authority, who made employment decisions, and who made the decision to pay other creditors instead of the IRS.
How to Defend Against TFRP
The two main defenses are: you were not a responsible person (you lacked actual authority), or the failure was not willful (you did not know about the delinquency or took steps to address it). Evidence includes corporate resolutions, bank signature cards, emails showing limited authority, and documentation of efforts to resolve the issue.
Real-World Example
A construction company in Burbank failed to remit $380,000 in payroll taxes over 8 quarters. The IRS assessed the full TFRP against both the owner and the CFO. We represented the CFO, who had check-signing authority but no decision-making role in tax matters. We submitted evidence showing the CFO's signature authority was clerical and that the owner made all tax-related decisions. The TFRP against the CFO was withdrawn.
TFRP Help in Burbank and Los Angeles
Trust Fund Recovery Penalty cases require immediate professional representation. Calculus Tax, Inc. handles TFRP defense for business owners and executives in Burbank, Los Angeles, and LA County. Call (310) 598-3759 or visit 1050 W. Alameda Ave., Burbank, CA 91506.
Frequently Asked Questions
Can I be assessed TFRP even if my business closed?
Yes. The TFRP is a personal assessment against you individually. Even if the business is dissolved, the IRS can pursue you personally for the trust fund portion of unpaid payroll taxes.
Is the TFRP dischargeable in bankruptcy?
No. The Trust Fund Recovery Penalty is not dischargeable in bankruptcy under either Chapter 7 or Chapter 13. It survives bankruptcy and remains collectible against you personally.
What is the difference between trust fund taxes and non-trust fund taxes?
Trust fund taxes are the employee's portion of payroll taxes that were withheld from paychecks. Non-trust fund taxes are the employer's matching portion. Only trust fund taxes trigger the TFRP — but both are owed to the IRS.
Can multiple people be assessed the same TFRP?
Yes. The IRS can assess the full TFRP against multiple responsible persons. However, if one person pays the full amount, the others' liability is satisfied.
How long does the IRS have to assess the TFRP?
The IRS must assess the TFRP within 3 years of the payroll tax due date for the relevant quarter. After 3 years, assessment is barred.
Can I set up a payment plan for a TFRP?
Yes. Once assessed, the TFRP balance can be resolved through an installment agreement, OIC, or CNC status, just like other tax debts. However, because it is personal liability, your personal financial situation is what matters.
Trust Fund Recovery Penalty: Personal Liability for Business Payroll Taxes Services in Los Angeles
Calculus Tax, Inc. provides trust fund recovery penalty: personal liability for business payroll taxes services to individuals and businesses throughout Los Angeles County. Our licensed CPAs are based in Burbank and serve clients in Burbank and surrounding communities.
Our Burbank office serves clients throughout Los Angeles County including Los Angeles, Long Beach, Santa Monica, Glendale, Burbank, and more.
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