Trust Fund Recovery Penalty (TFRP) — Complete Guide, FAQ & What To Do Next

The Trust Fund Recovery Penalty is a civil penalty aimed at unpaid trust fund taxes. These are the amounts employers withhold from employees’ wages (federal income tax withholding and the employees’ share of FICA taxes). The IRS treats these withheld amounts as trust funds held by the employer for the government — the employer is a custodian, not the owner. When those funds aren’t remitted, the IRS can look past the corporate entity and pursue individuals who were responsible for collecting and paying those amounts.

Why it matters: the IRS can assess 100% of unpaid trust fund taxes against responsible people. That can include salaries, bank accounts, property liens, and other collection tools — and personal bankruptcy generally won’t eliminate this debt.

“Responsible person” is a broad, functional term. It includes anyone who had the authority and control to:

• Sign checks or disburse funds;
• Direct which creditors are paid;
• Make payroll, hiring/firing, or otherwise control financial affairs;
• Prepare or file payroll tax returns or payroll deposits.

This may include: corporate officers, directors, majority shareholders, a CFO, comptroller, bookkeeper, payroll manager, or even third parties who effectively acted as the employer’s financial controller.

Key point: you don’t need job title to be responsible — you need control. Courts evaluate actual functions and authority, not formal corporate labels.

The TFRP requires two elements: responsibility and willfulness. Willfulness is not the same as criminal intent. In the TFRP context it generally means a voluntary, conscious decision to use funds for other creditors rather than to pay the trust fund taxes. Examples that can show willfulness include:

• Knowing taxes are overdue but using payroll funds to pay vendors, rent, or other obligations instead.
• Failing to deposit payroll taxes on multiple occasions despite knowing the deposit rules.
• Keeping inadequate or falsified records to conceal tax liabilities.

Willfulness can be inferred from patterns of payments and financial control; you don’t need to have tried to “defraud” the government in the criminal sense.

When the IRS can’t collect unpaid trust fund taxes from the business, a Revenue Officer (RO) will typically:

1. Review payroll tax returns and payment records.
2. Summon bank records, cancelled checks, signature cards, and corporate resolutions.
3. Interview officers, employees, and third parties to establish who controlled payments.
4. Identify persons who meet the responsibility and willfulness tests and issue a notice of proposed assessment (often Letter 1153) with Form 2751 (Agreement to Assessment).

The notice gives the person limited time to respond or appeal. If no appeal is filed in the permitted period, the IRS can assess and move to collection.

If you get Letter 1153, act quickly and calmly:

1. Don’t ignore it. Silence is the worst choice — the IRS will assess and then collect.
2. Gather documents. Bank statements, canceled checks, payroll reports, board minutes, check-signing authorizations, payroll tax returns (filed and unfiled).
3. File missing returns immediately. Filing late returns can reduce willfulness risk and prevent further aggravation.
4. Contact an experienced federal tax representative (Enrolled Agent, CPA, or tax attorney). TFRP cases are fact-specific and procedural traps are common.
5. Consider timely appeal. The notice includes instructions — appeal preserves rights and triggers administrative review.

Appealing requires factual and legal arguments (who had control, what decisions were made, legitimate lack of authority or notice, innocent spouse-style defenses in rare contexts).

There are three primary administrative and judicial routes:

1. Administrative appeal / Appeals Conference. You can request an administrative appeal and present evidence and witnesses. A successful Appeals case can prevent assessment.
2. Pay & sue for refund. If the IRS assesses and you lose administratively, you may pay (fully or in a divisible portion) and then file a refund claim (Form 843) and, if necessary, litigation. Note: payment starts a statutory clock for filing a refund suit.
3. File suit in federal court. After administrative remedies, you may bring a suit for refund — but strict deadlines apply.

Important: The deadlines are strict. If you don’t appeal or pay timely, you can lose procedural rights to challenge an assessment.

If TFRP is assessed, your options typically include:

• Installment Agreement (IA): Monthly payments based on ability to pay. The IRS may accept manageable payments instead of immediate collection.
• Offer in Compromise (OIC): Possible in rare cases where collection would create financial hardship or doubt exists about liability. OICs for trust fund liabilities are less common and often complex.
• Abatement or Partial Abatement: If you can show reasonable cause or an error in the assessment, Appeals may consider abating some or all liability.
• Partial Payment Installment Agreement: For large liabilities, partial payment arrangements sometimes help preserve assets while paying down the liability.

Working with counsel helps identify the best route — Appeals, collection alternatives, or litigation.

The law also addresses situations where a lender or third party directly pays wages or supplies funds specifically for payroll:

• Third-party payors who directly pay employees can be liable for the employer’s withholding taxes under certain rules.
• If a lender supplies funds with actual knowledge that payroll taxes won’t be paid, the lender can have limited liability (statutory caps may apply).
• Control matters. If a payor exerts enough control over finances, they can be treated as the employer for tax purposes.

This is why banks and lenders sometimes insist on covenants and controls to avoid exposure.

TFRP liabilities are non-dischargeable in bankruptcy for individuals. That means even if you file for personal bankruptcy, TFRP will survive and remain collectible. Likewise, a corporation’s bankruptcy generally does not protect responsible individuals from assessment.

Chapter 11 corporate reorganizations sometimes allow courts to designate how payments are applied, but that’s case-specific and not a reliable safeguard. If you’re involved in a bankruptcy scenario, coordinate strategy with experienced tax and bankruptcy counsel.

There are key timing rules that affect both the IRS and taxpayers:

• The IRS typically has three years from the later of the return’s due date or filing date to assess trust fund liabilities against the corporation or responsible persons.
• Different timeframes and tolling events (waivers, bankruptcy, absence from the U.S.) can extend assessment time.
• If you are assessed and want to sue for a refund, strict timelines apply for filing suit after administrative denial. Missing those windows can be fatal to a legal challenge.

Because the timing rules are complicated and exceptions exist, get professional help immediately if you see notices or believe an assessment is possible.

Common defenses the IRS and courts consider:

• Lack of responsibility: Evidence you lacked authority or control over financial decisions (no check signing, no ability to direct payments).
• Lack of willfulness: Demonstrating you tried to pay the trust fund taxes, or used available funds to keep the business operating in a way that suggests no conscious preference for other creditors.
• Reliance on others: If someone else was the corporate financial controller and you had no reason to suspect malfeasance, that can be persuasive.
• Innocent mistake and reasonable cause: Sometimes reasonable cause and good faith can reduce or eliminate penalties.

Real-world example (illustrative): A controller who prepared payroll but whose checks were signed by the CEO may still be found responsible if the controller had authority to control bill payments or the ability to stop a check. Conversely, an executive who oversaw operations but never had access to financial statements or check approvals may successfully argue lack of responsibility.

Cases hinge on documentary evidence: board minutes, signature authorizations, bank access records, and contemporaneous communications.

If you suspect TFRP exposure or receive a notice, collect:

• Payroll tax returns (filed and unfiled) and payroll ledgers
• Bank statements and cancelled checks for the relevant periods
• Check-signing authorizations and signature cards
• Corporate bylaws, resolutions, and minutes showing officer roles
• Contracts, loan agreements, and communications with lenders
• Emails and text messages about payments or payroll instructions
• Payroll reports, payroll service records, and personnel files
• Anything showing who authorized payments and who controlled cash flow

Early evidence collection preserves your ability to tell a credible, document-supported story.

An experienced representative (EA, CPA or attorney) will:

• Review the IRS file and relevant documents
• Advise on immediate procedural steps (appeals, filing missing returns)
• Build factual and legal defenses around responsibility and willfulness
• Negotiate with the IRS Appeals or Collection Division for abatement, payment plans, or compromise when appropriate
• Handle refund claims and, if necessary, federal court litigation

TFRP Representation matters. Many procedural missteps can erode defenses; a knowledgeable advocate protects rights and keeps deadlines.

The TFRP can reach deep into personal finances and is aggressively enforced. If you face possible TFRP exposure:

1. Don’t panic — but do act. Immediate steps materially affect outcomes.
2. File missing payroll returns and preserve evidence. Timely compliance and documentation are crucial.
3. Get professional representation. TFRP matters are fact-specific and legally technical.
4. Consider appeals and collection alternatives early — they can prevent harsher collection steps.
5. Understand the risk to third parties (lenders, guarantors, etc.) and coordinate response across stakeholders.

Get professional help today by calling us at 1-877-788-2937.