Businesses with employees are required to withhold certain payroll taxes—such as federal income taxes and FICA taxes (Social Security and Medicare)—from employees’ paychecks and remit these funds to the IRS. These taxes are known as “trust fund” taxes because employers hold these amounts “in trust” for the government. Failure to pay these trust fund taxes triggers the IRS’s enforcement mechanism called the Trust Fund Recovery Penalty (TFRP).
IRS Letter 1153 serves as a formal warning that the IRS intends to propose the TFRP against one or more individuals deemed “responsible persons” who had control over tax payments and willfully failed to remit these withheld taxes to the government. The penalty equals the full amount of the unpaid trust fund taxes, and the IRS can pursue collection from the individuals personally.
Who Is Considered a “Responsible Person”?
A “responsible person” can be any individual who had the duty and authority to collect, account for, and pay over payroll taxes. This includes but is not limited to:
- Business owners, especially those who have operational control
- Corporate officers such as presidents, treasurers, and vice presidents
- Members of the board of directors
- Officers or employees with signatory authority over financial accounts or payroll payments, like CFOs or bookkeepers
- Other individuals with significant control over disbursement of funds who knew or should have known about the unpaid taxes
The IRS does not require intent to evade taxes; “willfulness” for TFRP purposes means the person knew the taxes were due and either intentionally disregarded the obligation or showed reckless disregard in failing to ensure payment.
What Does IRS Letter 1153 Contain?
The letter specifies the period of unpaid payroll taxes, the amount of the proposed penalty, and your rights, including the right to contest the assessment. Typically, you have 60 days from the letter’s date to respond before the IRS finalizes the penalty assessment.
Steps to Take if You Receive IRS Letter 1153
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Review the Letter Carefully: Understand the tax periods, penalty amounts, and reasons for the proposed penalty.
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Gather Documentation: Collect all relevant financial records, payroll reports, bank statements, corporate meeting minutes, and correspondence that shed light on your role and the company’s tax payments.
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Respond Within Deadline: You usually have 60 days to respond to avoid automatic penalty assessment.
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Seek Professional Assistance: Engage a tax attorney or Enrolled Agent experienced in IRS payroll issues to help evaluate your case and represent you.
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Dispute if Warranted: If you believe you are not a “responsible person” or the penalty is wrongly applied, you have the right to file a formal protest with the IRS Appeals Office.
Common Misconceptions
- The letter only targets owners: False. Anyone with significant control and authority can be liable.
- Bankruptcy wipes out the TFRP: Generally no. The trust fund penalty is not dischargeable in most bankruptcies.
- Only CEOs are responsible: Bookkeepers or financial officers with authority can also be held liable.
- The IRS doesn’t enforce these penalties: The IRS aggressively pursues unpaid trust fund taxes because these funds belong to employees.
Appeals and Payment Options
You can appeal the proposed penalty by requesting a conference with the IRS Appeals Office as detailed in the letter. If the penalty is assessed, you may arrange a payment plan through an Installment Agreement or consider offers in compromise under IRS rules. Early engagement with professionals helps navigate these options effectively.
For more details, see our related article on the Trust Fund Recovery Penalty (TFRP).
References
- IRS Internal Revenue Manual, Part 20.1.1.1.2.14: Trust Fund Recovery Penalty (TFRP) irs.gov – IRM 20.1.1.1.2.14
- IRS Publication on Trust Fund Recovery Penalties IRS.gov
Understanding IRS Letter 1153 and responding promptly can protect you from significant personal financial liability for unpaid payroll taxes.