Quick answer

The Trust Fund Recovery Penalty (TFRP) lets the IRS collect withheld payroll taxes from individuals who had the duty and authority to ensure those taxes were paid. If you receive a proposed TFRP (commonly via Form 4180) or a notice of assessment, act quickly: gather documentation, identify who had control over payroll funds, and consider an administrative appeal. (IRS guidance: https://www.irs.gov/businesses/small-businesses-self-employed/trust-fund-recovery-penalty)

Background and purpose

The TFRP was created to prevent employers from using employee‑withheld funds for business operations. The IRS treats those withheld amounts as trust funds held for the government—not the employer—so failure to remit can expose individuals to personal liability. In practice, the IRS first issues a fact‑finding questionnaire (Form 4180) to identify “responsible persons.” If the IRS later determines a person acted willfully, it can assess 100% of the unpaid trust‑fund tax against that person.

How the IRS assesses the penalty

  • Trust fund tax: the penalty covers withheld income tax and the employee portion of Social Security and Medicare (the “trust‑fund” portion), not the employer’s share of payroll taxes.
  • Responsible person: the IRS looks for someone with the authority to make payroll decisions (sign checks, approve payments, direct bank withdrawals).
  • Willfulness: the IRS must show the responsible person knew the taxes were owed and intentionally disregarded the obligation (willfulness can be inferred from reckless behavior or deliberate choice).
  • Process: IRS agents often begin with Form 4180; after review they may issue a Notice of Penalty Determination and assessment. The IRS generally follows standard assessment periods for tax liabilities, though specific timing can vary depending on facts and filing dates. (See IRS TFRP page.)

Who can be a “responsible person”?

Examples include owners, officers, comptrollers, payroll managers, anyone who had the authority and control over corporate bank accounts or payment decisions. A third‑party payroll provider can be liable only if that provider actually had control and authority to pay taxes in a manner consistent with being a responsible person.

How to respond if you receive Form 4180 or a penalty notice

1) Read the notice and deadlines carefully. Form 4180 is a fact‑finding step — respond accurately and within any stated time frame.
2) Gather evidence: payroll journals, bank statements, check registers, board minutes, payroll service agreements, invoices, canceled checks, and correspondence showing payment decisions.
3) Identify who had authority: document approval chains, signature authorities, and job responsibilities.
4) Evaluate willfulness defenses: common defenses include lack of authority, reasonable cause (bankruptcy, sudden illness), or demonstrating that funds were not available to pay — but mere inability to pay is not automatically an absolute defense.
5) Consider professional representation: a CPA, enrolled agent, or tax attorney can draft the response, negotiate with the IRS, and represent you in appeals.
6) If assessed, consider appeals: you can request an appeal with the IRS Independent Office of Appeals or submit a written protest and supporting evidence. If you pay the assessed penalty to stop collection, you can later file a claim for refund.

Evidence checklist (what helps you contest a TFRP)

  • Payroll tax returns (Form 941) and deposit records
  • Bank statements showing cash flow and withdrawals
  • Documents showing who signed or authorized payments
  • Payroll provider contracts or service records
  • Internal emails or minutes that show knowledge or lack of knowledge about tax obligations

Options after an assessment

  • Administrative appeal: request the IRS Appeals Office review the determination.
  • Pay and file for refund: pay the assessment to stop collection and file a claim for refund with supporting evidence if you believe the assessment was wrong.
  • Offer in Compromise (OIC): rarely approved for trust‑fund portions because those amounts are treated as priority liabilities, but it remains an option in very limited circumstances (see IRS Offer in Compromise guidance).
  • Collection alternatives: if you cannot pay, explore installment agreements but be aware the IRS prioritizes trust‑fund taxes for collection.

Prevention: practical steps employers should use now

  • Segregate trust funds: keep withheld payroll taxes in a separate account or ensure bookkeeping flags them as restricted.
  • Timely deposits: follow the correct deposit schedule (monthly or semiweekly) and reconcile payroll deposits weekly.
  • Dual control and approvals: require more than one sign‑off for large transfers.
  • Use reputable payroll services and verify deposits: regularly confirm that payroll providers actually remit taxes.
  • Regular financial oversight: run payroll reconciliations and cash‑flow forecasts so trust funds aren’t repurposed accidentally.

Common misconceptions

  • Misconception: Only owners get hit. Fact: any “responsible person” (officer, manager, payroll lead) can be assessed.
  • Misconception: The penalty is criminal tax. Fact: TFRP is a civil penalty, though willful failure to pay payroll taxes can also have criminal consequences in extreme cases.

Short FAQs

  • Can I avoid a TFRP by saying I didn’t know? Knowledge is part of the willfulness analysis; lack of direct knowledge can help if you can show no authority or reasonable cause.
  • How much is the penalty? The TFRP equals 100% of the unpaid trust‑fund tax amount.
  • Where can I get official details? See the IRS page on the Trust Fund Recovery Penalty for forms, procedures, and FAQs: https://www.irs.gov/businesses/small-businesses-self-employed/trust-fund-recovery-penalty

Further reading and internal resources

Professional disclaimer

This article is educational and does not constitute legal or tax advice. If you face a potential TFRP assessment, consult a qualified tax attorney, CPA, or enrolled agent promptly to evaluate your specific situation and represent you before the IRS.

Author note (experience‑based): In my practice advising small businesses, prompt documentation and early professional involvement change outcomes — responding to Form 4180 with clear records often prevents an assessment or helps win appeals.

Sources

  • Internal Revenue Service, “Trust Fund Recovery Penalty” (IRS.gov).
  • IRS instructions for Form 4180 (fact‑finding questionnaire) and penalty procedures.