Background — why TFRP exists
The federal government treats income tax withheld from employees and the employee portion of Social Security/Medicare (FICA) as trust funds. When those amounts aren’t deposited, the IRS can assess a Trust Fund Recovery Penalty (TFRP) against individuals who were responsible for collecting, accounting for, and paying the trust fund taxes and who acted willfully. (IRS: Trust Fund Recovery Penalty) https://www.irs.gov/businesses/small-businesses-self-employed/trust-fund-recovery-penalty
How the IRS decides who is a “responsible person” and whether conduct was willful
- Responsible person: anyone with the authority to collect, record, or pay trust fund taxes — common examples include owners, officers, payroll managers, and financial controllers. Authority can be formal (signatory on bank accounts) or practical (regularly approving payroll).
- Willfulness: the IRS looks for voluntary, conscious, and intentional choices to not pay trust fund taxes. Examples include paying other creditors while knowing payroll taxes were unpaid or hiding financial records. Lack of knowledge or lack of authority can be defenses.
Common defenses and how to document them
1) Not a responsible person — show lack of control or authority: corporate minutes, delegation memos, and access logs.
2) No willful behavior — document attempts to pay taxes, contemporaneous communications (emails, board minutes) showing intent to prioritize payroll taxes, or evidence that management was misled.
3) Reliance on professional advice — show written, reasonable reliance on CPA or payroll firm when you reasonably believed they were handling deposits. (Note: reliance must be reasonable and documented.)
4) Administrative or calculation error — if the IRS misapplied payments or miscalculated, provide bank records, payroll reports, and reconciliations.
Procedural steps when you get a TFRP notice
- Read the notice carefully and preserve all records for the relevant periods.
- Contact a tax attorney or CPA experienced with TFRP cases immediately — in my practice, early engagement improved outcomes because we could quickly gather proof of authority, payment attempts, and internal controls.
- If the IRS proposes a TFRP, you can challenge the proposed assessment with the IRS Office of Appeals or pursue refund procedures if the penalty has already been assessed and paid. Follow IRS instructions on the notice and meet appeal deadlines. (See IRS guidance linked above.)
Practical prevention steps employers should use now
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Segregate trust funds: hold withholding taxes in a separate account and avoid using them for operations.
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Strong internal controls: implement written payroll procedures, dual approvals for transfers, and regular reconciliations. See our guides on building an internal audit checklist and implementing payroll controls for step‑by‑step actions: “How to Build an Internal Audit Checklist for Payroll Taxes” and “How to Implement Internal Controls to Prevent Payroll Errors.”
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How to Build an Internal Audit Checklist for Payroll Taxes: https://finhelp.io/glossary/how-to-build-an-internal-audit-checklist-for-payroll-taxes/
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How to Implement Internal Controls to Prevent Payroll Errors: https://finhelp.io/glossary/how-to-implement-internal-controls-to-prevent-payroll-errors/
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Use electronic federal tax payment system (EFTPS) and set calendar reminders for deposits and returns.
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Maintain current payroll documentation and run monthly reconciliations to detect shortfalls early; see “Payroll Taxes: Employer Responsibilities and Common Penalties” for compliance basics: https://finhelp.io/glossary/payroll-taxes-employer-responsibilities-and-common-penalties/
What to expect on outcomes and enforcement
If the IRS successfully proves responsibility and willfulness, the assessed TFRP equals the unpaid trust fund tax dollar-for-dollar. The IRS can collect from personal assets, file liens, garnish wages, or levy bank accounts. In many cases negotiated resolutions include installment agreements, penalty abatements for reasonable errors, or offers in compromise — but these options depend on facts and IRS discretion.
Real-world example (anonymized)
A small construction firm had payroll shortages after cash-flow problems; corporate officers paid suppliers while withholding taxes went unpaid. The IRS proposed TFRPs against two officers. By documenting board discussions, showing who had check-signing authority, and proving one officer was never authorized to approve payroll payments, we limited assessments to the senior officer who controlled disbursements and negotiated an installment plan for the remainder.
Common misconceptions
- Myth: Only the business can be liable. Fact: Responsible individuals may be pursued personally.
- Myth: Partial payments avoid TFRP. Fact: Partial payments don’t prevent an assessment if the IRS finds willfulness or responsibility.
Quick checklist if you’re facing a proposed TFRP
- Preserve all payroll, bank, and communications records.
- Gather documentation of authority and delegation.
- Contact a CPA or tax attorney immediately.
- Consider immediate remedial steps (segregate funds, halt distributions) while you prepare your defense.
Authoritative sources
- IRS — Trust Fund Recovery Penalty (TFRP): https://www.irs.gov/businesses/small-businesses-self-employed/trust-fund-recovery-penalty
- Nolo — Trust Fund Recovery Penalty overview: https://www.nolo.com/legal-encyclopedia/trust-fund-recovery-penalty-what-is-it-32258.html
Professional disclaimer
This entry is educational and does not constitute legal or tax advice. Every TFRP case depends on specific facts; consult a qualified tax attorney or CPA to evaluate liability and represent you before the IRS.
