When a business withholds payroll taxes from employees’ wages, it is legally required to remit those funds to the IRS. These taxes include income tax withholding, Social Security tax, and Medicare tax, which are referred to as “trust fund taxes” because the employer holds them in trust before depositing them with the government.

If a business fails to pay these taxes, the IRS can assess the Trust Fund Recovery Penalty (TFRP)—a severe penalty that holds certain individuals personally responsible for the unpaid taxes. Unlike other business liabilities, which are typically limited to corporate entities, the TFRP allows the IRS to pierce the corporate veil and hold individuals personally accountable.

The IRS uses two key factors to determine whether the TFRP should apply:

  1. Who is responsible for the failure to pay the payroll taxes?
  2. Did the responsible person act willfully in failing to pay the taxes?

If the IRS determines that both factors are met, the responsible person may be required to personally repay the full amount of the unpaid payroll taxes, along with interest and penalties.

Determining Responsibility: Who Can Be Held Liable?

The first step in the IRS investigation is identifying the individuals responsible for ensuring that payroll taxes were collected and paid. While many assume that only business owners or CEOs can be held liable, the IRS’s definition of a “responsible person” is much broader.

A responsible person may include:

  • Owners, partners, and corporate officers
  • Employees with financial decision-making power
  • Payroll managers or bookkeepers
  • Board members and trustees
  • Accountants or third-party payroll providers with authority over tax payments

The IRS determines responsibility based on control over financial decisions, not just job titles. If an individual had the ability to decide which creditors to pay and was aware of the unpaid tax obligation, they may be held liable.

During the investigation, the IRS may request:

  • Bank statements
  • Cancelled checks
  • Bank signature cards
  • Articles of incorporation
  • Meeting minutes
  • Financial records showing payroll deposits

One common misconception is that having check-signing authority alone does not automatically make someone responsible. However, if an individual had knowledge of unpaid payroll taxes and had the ability to ensure payment but failed to do so, they could be found liable (IRS.gov).

What Does “Willful” Mean?

After establishing responsibility, the IRS must determine whether the failure to pay was willful.

A willful failure to pay occurs when a responsible person:

  • Knew taxes were due but chose not to pay them
  • Used withheld payroll taxes for other business expenses (such as rent, supplier payments, or utilities)
  • Disregarded IRS notifications and warnings about the unpaid taxes
  • Allowed the business to continue operating without addressing tax liabilities

A willful act does not require intent to defraud the IRS. Even if a business is experiencing financial hardship, using payroll tax funds to cover other expenses instead of remitting them to the IRS is considered willful noncompliance.

Additionally, if multiple individuals were aware that the company was not paying its payroll taxes but took no action to correct the issue, they could all be held personally liable under the TFRP.

Consequences of the TFRP

Once the IRS assesses the Trust Fund Recovery Penalty, the consequences can be severe:

  • Personal Liability: The responsible individual must pay the penalty from personal assets, even if the business closes or files for bankruptcy.
  • Interest and Penalties: The TFRP accrues interest, increasing the total amount owed over time.
  • IRS Collection Actions: If the penalty is not paid, the IRS may use aggressive collection methods, such as:
    • Wage garnishments
    • Bank levies
    • Liens on personal property and real estate

Because the TFRP is non-dischargeable in bankruptcy, individuals held liable cannot escape the debt through a bankruptcy filing.

What Are Your Options If You Owe a TFRP?

If you are assessed a TFRP and cannot pay the full amount immediately, there are potential resolution options:

  1. Installment Agreements – The IRS may allow you to pay the penalty in monthly installments.
  2. Offer in Compromise (OIC) – If you qualify, you may be able to settle your tax debt for less than the full amount owed.
  3. Penalty Abatement – In rare cases, you may be able to challenge the penalty if you can prove you were not responsible or the failure to pay was not willful.

Because the TFRP process is complex and high-stakes, seeking professional representation is critical.

How We Can Help

At Tax Resolutions, we specialize in helping business owners, executives, and financial officers navigate TFRP assessments. Our firm is family-owned, and our team includes former IRS employees who understand exactly how the IRS investigates and enforces payroll tax violations.

We provide:

  • Expert consultation to determine your best course of action
  • Negotiation with the IRS to explore settlement options
  • Defense strategies to challenge improper TFRP assessments
  • Comprehensive tax resolution services to protect your assets and financial future

If you’ve been contacted by the IRS regarding unpaid payroll taxes or the Trust Fund Recovery Penalty, do not wait until it is too late. The IRS moves swiftly, and ignoring their notices can result in aggressive collection efforts.

Contact David or Gerald Yarborough today to discuss your options.

Let us use our 40+ years of experience to protect your business, your finances, and your peace of mind.