What is trust fund recovery penalty?

| by Max Soni

Thanks for visiting Spodek Law Group – a second-generation law firm managed by Todd Spodek. We have over 40 years of combined experience handling complex federal tax cases, white-collar criminal matters, and financial investigations. Todd represented Anna Delvey in her Netflix trial, handled the Ghislaine Maxwell juror misconduct case, and worked on the Alec Baldwin stalking matter. If you’re dealing with the IRS Trust Fund Recovery Penalty, you need experienced representation immediately.

The Trust Fund Recovery Penalty is how the IRS comes after business owners, CFOs, executives, bookkeepers – anyone they decide was “responsible” for not paying employee payroll taxes. It’s personal liability for business taxes, meaning the IRS can take your house, bank accounts, retirement savings. The penalty equals 100% of the unpaid trust fund taxes. That’s why people call it the 100% penalty.

What makes this penalty different is that it pierces straight through the corporate structure. You formed an LLC to protect yourself, set up a corporation to separate business debts from personal debts – none of that matters when the IRS asserts the TFRP. They’re coming after you personally, even if the business filed bankruptcy or shut down entirely.

Trust fund taxes are the portions of employee paychecks you withhold – federal income tax, Social Security, Medicare. When you withhold those amounts from wages, that money isn’t yours and it isn’t the company’s. You’re holding it in trust for the federal government. The government views you as someone who collected their money and decided not to hand it over. They don’t care that the business was struggling, that you had to make payroll, that creditors were demanding payment.

The penalty doesn’t include the employer’s share of Social Security and Medicare – just amounts withheld from employee paychecks plus the employee share of FICA taxes. If your company had 20 employees and fell behind on payroll taxes for six months, you could personally owe hundreds of thousands of dollars.

Who the IRS decides is a “responsible person” determines everything. This isn’t just the CEO or owner. The IRS looks at anyone who had the duty to collect, account for, and pay these taxes – and the power to decide which bills got paid. Financial officers, board members, payroll administrators, corporate officers who signed checks. Sometimes outside accountants or bookkeepers if they had enough control.

Responsibility comes down to whether you exercised independent judgment over the company’s financial affairs, according to IRS guidelines on establishing responsibility and willfulness. You don’t have to be the only person responsible – the IRS holds multiple people liable for the same unpaid taxes. They assess the full penalty against three different executives and collect from whichever one has assets.

The “willfulness” requirement is the second part. Willfulness doesn’t mean you intended to defraud the government. It means you knew about the unpaid payroll taxes and voluntarily chose to pay other creditors instead. You paid rent, suppliers, next period’s payroll – but not the trust fund taxes already withheld. That’s willfulness.

Reckless disregard counts too. If you were in a position to know about payroll tax problems and didn’t bother checking, if you ignored obvious signs, if you turned a blind eye – that’s enough. The IRS doesn’t need proof you said “let’s not pay payroll taxes.” They just need to show you had reason to know and didn’t take action.

Once the IRS pursues the TFRP against you, they’ll conduct an investigation using Form 4180 interviews. They ask detailed questions about your role, your duties, check-signing authority, who made payment decisions, whether you knew about tax delinquencies. Everything you say can establish that you were responsible and willful. Most people walk into these interviews without a lawyer and talk their way into massive personal liability.

After investigation, if the IRS determines you’re a responsible person, they send Letter 1153 and Form 2751 – the proposed assessment. You have 60 days from that letter to appeal. Outside the United States, you get 75 days. Miss it and the IRS assesses the penalty without further opportunity to contest it administratively.

Signing Form 2751 doesn’t waive your appeal rights. According to current IRS procedures, you can sign the form and still appeal within 60 days if you change your mind. But waiting is dangerous because deadlines don’t extend for weekends or holidays unless specifically stated.

The appeals process depends on amount. Proposed penalty of $25,000 or less per period – you file a Small Case Request with written explanation and supporting documentation. Over $25,000 per period requires formal written protest. Either way, you need evidence showing you weren’t responsible, weren’t willful, or both.

Defenses exist but they’re narrow. Lack of responsibility works if you didn’t have real authority over financial decisions, were following orders, didn’t have check-signing power or access to financial information. Lack of willfulness works if you weren’t aware of unpaid taxes, relied on someone else for payroll tax compliance, or took reasonable steps to ensure payment but were undermined.

The statute of limitations is three years from April 15 following the year the payroll tax return was due. For 941 quarterly returns filed for Q1 2024, the IRS has until April 15, 2028 to assess the TFRP. Once assessed, they have ten years to collect it. Ten years of levies, liens, wage garnishments, seizures of personal assets.

Collection is aggressive once the assessment becomes final. The IRS files Notice of Federal Tax Lien, destroying your credit and clouding title to property. They levy bank accounts, garnish wages, seize assets. They can take your home, car, retirement accounts. The TFRP is not dischargeable in bankruptcy in most situations.

Multiple responsible persons means the IRS can collect from any or all of you. Three responsible executives – the IRS collects 100% from whoever has assets first, then that person sues the others for contribution through separate civil litigation. The IRS doesn’t care about sorting percentages.

People come to us after they’ve already talked to the IRS, already admitted responsibility in Form 4180 interviews, already missed appeal deadlines. The earlier you get representation, the more options exist. If you’re contacted for a Form 4180 interview, that’s when to hire counsel – before you say anything establishing responsibility and willfulness. If you receive Letter 1153, act within days because 60 days disappears fast.

We’ve handled TFRP cases where the IRS initially assessed millions in personal liability against corporate officers. Sometimes we’ve gotten penalties abated entirely by showing lack of responsibility or willfulness. Other times we’ve negotiated substantial reductions by demonstrating the client didn’t control payroll tax decisions. Success depends on specific facts – who made financial decisions, what the client knew and when, what efforts were made to address delinquencies.

At Spodek Law Group, we focus on only working with clients we can genuinely help – and TFRP cases require immediate action and detailed investigation. Doing nothing is the worst option. The penalty doesn’t go away, the IRS doesn’t forget, and once assessment is final, you’ve lost your best opportunities to fight it. If you’ve received IRS communication about trust fund taxes or TFRP investigations, reach out immediately. Our attorneys have represented clients in high-stakes financial cases – we understand how the IRS builds these cases and how to challenge them. We’re available 24/7 because federal tax emergencies don’t wait for business hours.