Background and why it matters

The Trust Fund Recovery Penalty (TFRP) exists to ensure employers remit withheld federal income and FICA taxes (the “trust fund” portion) to the IRS. When those withheld amounts aren’t deposited, the IRS may assess the unpaid trust fund taxes against individuals who had the duty and authority to collect and pay them. That assessment can pierce corporate shelter and become a personal financial obligation.

How TFRP assessments work (plain-language steps)

  • Withholding ≠ protection: Employee income and Social Security/Medicare taxes that you withhold are held in trust for the government. If they aren’t deposited, the IRS treats them as unpaid trust fund taxes. (IRS: Trust Fund Recovery Penalty)
  • Responsible person test: The IRS looks at who had control over payroll, disbursements, and financial decisions—not just official titles. Someone who signed checks, approved payroll, or directed payments can be targeted.
  • Assessment: If the IRS determines a responsible person willfully failed to remit, it can assess the full amount of unpaid trust fund taxes as a penalty, plus interest, and pursue collection from that individual.

Real-world examples and practical impact

In my practice I’ve seen small-business owners face high personal exposure when operating cash shortages led them to use withheld payroll taxes for operating expenses. Even if you didn’t intend to avoid taxes, the IRS can still assert liability if it finds willfulness or reckless disregard.

Who is typically affected

  • Owners, officers, partners, payroll managers, and bookkeepers who control payments and cash flow.
  • Individuals who had authority to sign checks, approve payroll or access company accounts.
  • Note: Legal business structure (LLC, S corp, C corp) does not automatically shield a person from TFRP.

Practical steps to reduce exposure (actionable controls)

  1. Separate trust funds from operating cash
  • Maintain a clear ledger and consider a dedicated account for withheld payroll taxes. This strengthens internal controls and provides evidence of intent to remit, though it doesn’t create a legal shield.
  1. Reconcile payroll and deposit schedules monthly
  • Match payroll reports, deposits, and Form(s) 941/FUTA filings each month. Early detection is the best prevention.
  1. Limit who can approve payments
  • Use dual controls: require two signers for transfers above thresholds and separate payroll duties from accounting and cash disbursement roles.
  1. Build and document cash-flow plans
  • If payroll deposits are at risk because of cash shortages, document the shortfall, alternatives considered, and decision-making—this documentation helps if you later argue reasonable cause.
  1. Use professional advisors promptly
  • Engage a CPA or tax attorney when you miss a deposit or receive an IRS notice. Early negotiation can preserve options for abatement, payment plans, or appeals.
  1. Train staff and keep written procedures
  • Provide payroll training and written policies so responsibility and procedure are clear.

When you face an alleged TFRP

  • Respond quickly to IRS notices and preserve records: bank statements, approvals, payroll ledgers, and board minutes.
  • Consider relief paths: reasonable-cause abatement, installment agreements for the business’s liability, or appealing the determination (IRS has review and appeals processes). Consult a tax attorney or experienced CPA for representation. (See IRS guidance on TFRP.)

Common misconceptions

  • Myth: A corporation shields managers automatically. Reality: The IRS’ responsible person test focuses on control, not corporate form.
  • Myth: Moving withheld funds to another account protects you. Reality: Commingling or diverting trust funds often increases risk; clear controls are the safer route.

Checklist: Immediate steps after a missed payroll deposit

  • Stop nonessential disbursements and prioritize trust fund deposits.
  • Reconcile the payroll period and identify the exact shortfall.
  • Contact your CPA or tax attorney and prepare documentation for the IRS.
  • If an IRS investigator contacts you, be cooperative but seek counsel before making detailed statements.

Related resources on FinHelp.io

Frequently asked questions (brief)

  • What triggers a TFRP? Late or nonpayment of withheld federal payroll taxes and evidence that a person had control and willfully failed to remit. (IRS)
  • Can you appeal a TFRP? Yes — you can contest the IRS’ determination through IRS appeals or collection review; retain counsel to preserve rights.

Authoritative sources and further reading

Professional disclaimer

This content is educational and not a substitute for personalized legal or tax advice. If you face potential TFRP exposure or an IRS inquiry, consult a qualified tax attorney or CPA immediately to review your facts and options.