For a business owner struggling with cash flow, falling behind on payroll taxes can happen faster than expected.
A customer pays late. Sales decline. Payroll is due. Rent, suppliers, insurance, and other expenses continue coming in. The business needs cash to survive, and money that should have been deposited with the IRS is temporarily used to keep the company operating.
The owner may intend to catch up as soon as business improves.
But unpaid federal payroll taxes are different from many other business debts.
If your company owes employment taxes to the IRS, closing the business, dissolving the company, or operating through a corporation or LLC does not necessarily mean the tax problem stays with the business.
Under certain circumstances, the IRS can assess part of the unpaid payroll tax liability personally against business owners, officers, and other responsible individuals through the Trust Fund Recovery Penalty.
That can turn a struggling company’s IRS problem into your personal IRS problem.
If your business owes payroll taxes, has received IRS collection notices, or has been contacted by an IRS Revenue Officer, understanding your potential personal exposure should be a priority.
Why Does the IRS Treat Unpaid Payroll Taxes So Seriously?
When an employer pays wages, it generally withholds federal income tax and the employee’s share of Social Security and Medicare taxes from employees’ paychecks.
Those withheld amounts are often called trust fund taxes because the employer holds the money in trust for the United States until it is deposited with the government.
The money may pass through the business’s bank account, but it is not simply another source of working capital.
When a business uses withheld payroll taxes to pay other expenses instead of depositing them with the IRS, the government views the situation differently from an ordinary unpaid business tax bill.
That distinction is one reason IRS payroll tax collection cases can become particularly serious.
What Is the Trust Fund Recovery Penalty?
The Trust Fund Recovery Penalty, commonly called the TFRP, is a mechanism the IRS can use to impose personal liability for certain unpaid trust fund taxes.
Despite the word “penalty,” this can involve a substantial amount of money.
If the requirements are satisfied, the IRS can assess the trust fund portion of the business’s unpaid employment taxes personally against one or more individuals.
For a business with payroll tax problems spanning multiple quarters, that personal assessment can become significant.
Once assessed, the IRS can pursue collection against the responsible individual’s personal assets and income.
In other words:
The business may owe the payroll taxes, but the IRS may eventually pursue you personally for the trust fund portion of that debt.
Who Can Be Personally Liable for Unpaid Payroll Taxes?
A common misconception is that only the owner of the business can be assessed the Trust Fund Recovery Penalty.
That is not necessarily true.
The IRS generally examines whether an individual was a responsible person and whether the required failure to collect, account for, or pay over the trust fund taxes was willful.
Depending upon the facts, potentially responsible persons may include:
- Business owners
- Corporate officers
- LLC members or managers
- Partners
- Directors
- Employees with significant financial authority
- Bookkeepers or financial personnel in some circumstances
- Other individuals who exercised sufficient control over the company’s finances and payment decisions
A person’s job title alone does not necessarily determine responsibility.
The IRS can examine what the person actually did and what authority the person actually possessed.
How Does the IRS Decide Who Was “Responsible”?
In a Trust Fund Recovery Penalty investigation, the IRS may examine who had authority and control over the company’s financial affairs.
Questions may include:
- Who had authority to sign company checks?
- Who controlled the business bank accounts?
- Who decided which creditors were paid?
- Who handled payroll?
- Who had authority to make federal tax deposits?
- Who signed employment tax returns?
- Who had access to the company’s financial records?
- Who could hire or fire employees?
- Who knew the payroll taxes were unpaid?
- Who had authority to direct payment of the taxes?
- Who made decisions to pay vendors, lenders, employees, or other creditors instead of the IRS?
The analysis can be highly fact-specific.
Simply being listed as an officer does not automatically resolve the question. Likewise, saying that someone else handled the taxes does not necessarily eliminate potential liability if you exercised sufficient financial control.
What Does “Willful” Mean in a Payroll Tax Case?
The concept of willfulness is also important.
People sometimes hear “willful” and assume the IRS must prove that they intentionally set out to cheat the government.
That is not necessarily the applicable standard in a civil Trust Fund Recovery Penalty case.
A major concern can arise when a responsible person knows that payroll taxes are unpaid but nevertheless causes or permits available business funds to be used to pay other creditors instead of the government.
Consider a business owner who knows the company is behind on federal payroll tax deposits but continues using available funds to pay suppliers, credit cards, rent, or other business expenses.
The owner may be trying desperately to save the business rather than intending to violate the tax laws.
Nevertheless, those payment decisions can create serious TFRP issues.
“My Accountant or Payroll Company Was Responsible.” Is That a Defense?
Not necessarily.
Hiring a CPA, bookkeeper, payroll processor, or employee to handle payroll does not automatically relieve a business owner or other responsible individual of potential liability.
The IRS may still examine who had ultimate authority over company finances and what the individual knew about the unpaid taxes.
The specific facts matter.
If you are facing a Trust Fund Recovery Penalty investigation, it is important to carefully evaluate your actual role rather than assuming that delegation to someone else ends the inquiry.
What Happens During an IRS Trust Fund Recovery Penalty Investigation?
An IRS Revenue Officer may investigate potential personal liability when a business has unpaid trust fund taxes.
The Revenue Officer may request corporate records, bank information, payroll documents, signature cards, canceled checks, tax returns, and other evidence concerning the company’s financial operations.
The IRS may also interview individuals it believes could potentially be responsible.
One document frequently associated with these investigations is Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes.
If the IRS wants to interview you concerning potential Trust Fund Recovery Penalty liability, the interview should be taken seriously.
The questions and answers can become important evidence in determining whether the IRS proposes a personal assessment.
The IRS Wants to Interview Me. Should I Just Answer Their Questions?
Before participating in an IRS interview concerning potential personal liability, it can be important to understand the issues the IRS is investigating.
You should know why the IRS considers you potentially responsible, what periods are involved, what your actual authority was, what you knew about the unpaid taxes, and what records support your position.
This is particularly important when several owners, officers, employees, accountants, or financial personnel were involved in the business.
An attorney experienced in IRS tax controversies can help evaluate the circumstances and represent you during the investigation.
What Is IRS Letter 1153?
If the IRS determines that it intends to assess the Trust Fund Recovery Penalty, it may issue Letter 1153 proposing the assessment.
This is an important stage of the case.
A Letter 1153 generally provides an opportunity to appeal the proposed Trust Fund Recovery Penalty, but strict deadlines apply.
Ignoring the letter can result in losing an important opportunity to challenge the proposed assessment before it becomes final.
If you receive a Letter 1153 or other notice proposing personal liability for business payroll taxes, it is important to review it promptly.
Can the IRS Pursue More Than One Person?
Yes.
The IRS is not necessarily required to choose only one responsible person.
Depending upon the circumstances, the Trust Fund Recovery Penalty can be assessed against multiple responsible individuals.
That means disputes sometimes arise among business partners, owners, officers, spouses involved in a business, employees, and others concerning who actually controlled the company’s finances and who was responsible for the unpaid payroll taxes.
This is another reason the investigation should not be treated casually.
What Happens If the Trust Fund Recovery Penalty Is Assessed Against Me?
Once a TFRP assessment becomes a personal federal tax liability, the IRS can pursue collection against the assessed individual.
Depending upon the circumstances and applicable collection procedures, that can potentially lead to:
- Federal tax liens
- Bank levies
- Wage levies
- Collection of personal assets
- IRS financial investigations
- Collection Information Statements
- IRS Revenue Officer involvement
- Other federal tax collection action
At that point, the fact that the taxes originally arose from a corporation or LLC may provide little comfort.
You now have a personal IRS tax collection problem.
Closing the Business Does Not Necessarily Make the Payroll Tax Problem Disappear
Business owners sometimes believe that shutting down an unsuccessful company will end its tax problems.
Closing a business may stop new payroll tax liabilities from accumulating, but it does not erase existing liabilities.
The IRS can continue attempting to collect unpaid business taxes and can investigate whether individuals should be personally assessed the Trust Fund Recovery Penalty.
Bankruptcy or dissolution of the business also does not automatically eliminate an individual’s potential TFRP exposure.
If your business is failing and has unpaid employment taxes, dealing with the payroll tax problem should therefore be part of the shutdown strategy—not an afterthought.
Your Business Is Still Operating. What Should You Do?
If the company is continuing to operate, one of the most important priorities is to stop creating new payroll tax liabilities.
A business that is trying to negotiate old IRS debt while continuing to accumulate new employment tax debt can face significant difficulties obtaining and maintaining a collection resolution.
Current tax compliance matters.
The business may need to address both:
- How to remain current with new payroll tax obligations, and
- How to resolve the existing back-tax liability.
Depending upon the circumstances, resolution of the existing debt may involve an installment agreement or another appropriate collection alternative.
But continuing to use current payroll tax deposits to finance business operations can make the situation progressively worse.
Can an IRS Payroll Tax Debt Be Negotiated?
Potentially, but the appropriate strategy depends upon the business’s circumstances.
An IRS payroll tax case may require analysis of:
- The total amount owed
- The quarters involved
- Whether all Forms 941 and other returns have been filed
- Current payroll tax compliance
- Business income and expenses
- Business assets
- Accounts receivable
- Available equity
- Ability to make monthly payments
- Whether the business is viable
- Whether a Revenue Officer has been assigned
- Whether levies or liens have been issued
- Potential Trust Fund Recovery Penalty exposure
- The personal financial circumstances of responsible individuals
Possible collection alternatives can vary significantly from case to case.
The important point is that waiting while new payroll tax liabilities accumulate is rarely a good strategy.
The IRS Has Assigned a Revenue Officer. Now What?
Payroll tax cases are among the matters that may receive direct attention from an IRS Revenue Officer.
If a Revenue Officer has contacted your business, the officer may request financial records, delinquent tax returns, bank information, accounts receivable information, and other documents.
Deadlines may be established.
The Revenue Officer may also begin investigating potential Trust Fund Recovery Penalty liability.
At this stage, the business should have a coherent strategy.
Simply responding to each IRS request as it arrives without understanding the overall collection objective can leave the owner reacting to the government rather than working toward a resolution.
Why Business Owners Should Address Payroll Tax Problems Early
There is an important difference between dealing with a payroll tax problem early and dealing with it after the IRS has escalated enforcement.
Early in the process, there may be more time to:
- Bring required tax returns into compliance
- Stop additional payroll tax liabilities from accumulating
- Review the accuracy of IRS assessments
- Analyze business finances
- Evaluate potential personal TFRP exposure
- Develop a collection strategy
- Communicate with the IRS
- Explore an appropriate payment or resolution alternative
Waiting can mean facing all of those issues while simultaneously responding to levies, liens, Revenue Officer deadlines, or a proposed personal assessment.
Indiana Tax Attorney for IRS Payroll Tax and Trust Fund Recovery Penalty Cases
I am Eric C. Keuling, founder of the Keuling Law Firm, and I have more than 18 years of tax and tax-resolution experience.
Before founding the Keuling Law Firm, my tax career included serving as a Tax Director with Grant Thornton in Tokyo, Japan. I also earned an LL.M. in Taxation from the University of Florida Levin College of Law.
Today, I represent individuals and businesses throughout Indiana in federal and state tax-resolution matters involving the IRS and Indiana Department of Revenue.
My tax practice includes representation involving:
- Unpaid federal payroll taxes
- Employment tax liabilities
- IRS Forms 941 and 940
- Trust Fund Recovery Penalties
- Form 4180 interviews
- Letter 1153 proposed assessments
- IRS Revenue Officer cases
- Business back taxes
- Individual IRS back taxes
- IRS installment agreements
- Offers in Compromise
- Partial Payment Installment Agreements
- Currently Not Collectible status
- Penalty abatement
- Federal tax liens
- Bank levies
- Wage garnishments
- Collection Due Process matters
- Unfiled and delinquent tax returns
- Indiana Department of Revenue tax matters
When you hire the Keuling Law Firm, I personally handle your tax matter. Your case is not passed from a salesperson to a case manager. I work directly with my clients, communicate and negotiate with the IRS or Indiana Department of Revenue, and develop a strategy based upon the particular circumstances of the case.
Your Company’s Payroll Tax Problem Could Become Your Personal Tax Problem
If your business owes payroll taxes, do not assume the liability will remain safely inside the corporation or LLC.
If the IRS believes you were a responsible person who willfully failed to collect, account for, or pay over trust fund taxes, the government may attempt to assess part of that liability against you personally.
And once that happens, your personal income and assets may become part of the IRS collection problem.
If an IRS Revenue Officer has contacted you about unpaid payroll taxes, requested an interview, asked you to complete Form 4180, or if you have received Letter 1153 proposing a Trust Fund Recovery Penalty, now is the time to understand your rights and potential exposure.
Contact the Keuling Law Firm to schedule a consultation regarding your IRS payroll tax or Trust Fund Recovery Penalty matter.
I can review the tax liabilities and IRS correspondence, evaluate the potential business and personal exposure, communicate with the IRS on your behalf, and help develop a strategy for addressing the problem.
A business tax debt is serious. When the IRS begins looking to you personally for payment, the stakes become considerably higher.
This article is provided for general informational purposes only and does not constitute legal or tax advice. Trust Fund Recovery Penalty liability, IRS collection procedures, appeal rights, and applicable deadlines depend upon the particular facts and circumstances of each case.