Are You a Responsible Person Who’s Liable for the IRS TFRP?
When it comes to payroll tax problems, the trust fund recovery penalty (TFRP) is notable because one or more “responsible persons” could be personally liable for it. The responsible person isn’t just limited to owners, partners, and shareholders; the IRS can even hold employees or outside contractors liable based on the role they play in the company.
The goal of this blog post is to explain what it means to be considered a responsible person for TFRP purposes, how the IRS makes this determination, and what you can do to defend yourself against the TFRP. For more information, contact the experienced tax professionals of the East Coast Tax Consulting Group as soon as possible.
Key Takeaways
- The Trust Fund Recovery Penalty (TFRP): The TFRP is equal to the unpaid trust fund balance and can be personally assessed against any “responsible person.”
- Responsible Person: A responsible person is someone who has the duty and power to collect and/or remit trust fund taxes, was aware they weren’t paid, and took willful steps that led to their nonpayment.
- Form 4180 Interview: To identify the responsible people, the IRS will conduct one or more Form 4180 interviews.
- Personal Liability: Responsible persons are personally liable for the TFRP, and the IRS can use tax collection tools like liens and levies to collect this penalty from the responsible individual’s personal assets.
- Tax Representation: It’s strongly recommended that anyone who thinks they may be a responsible person and subject to the TFRP seek professional tax assistance.
Why Is the IRS so Serious About Trust Fund Taxes?
Trust fund taxes refer to taxes that a taxpayer (like a business) collects from another taxpayer (the business’s employees or customers) and holds in trust before remitting to the relevant tax collection agency.
At the federal level, the most common types of trust fund taxes are excise taxes and employment taxes, such as income tax and FICA tax (Social Security and Medicare) withheld from employees’ paychecks. Trust fund taxes can also be found at the state and local level, most often with sales taxes and state withholding taxes.
The IRS takes trust fund tax issues so seriously because they involve the business misappropriating money belonging to its employees. As a result, when a business fails to meet its trust fund tax obligations, the IRS will not only try to recover these unpaid taxes from the business itself, but any individual responsible for their nonpayment.
Who’s a “Responsible Person?”
The IRS will deem an individual to be responsible for the TFRP if they:
- Had the responsibility for paying or collecting the trust fund taxes, and
- Intentionally failed to pay or collect the trust fund taxes.
An individual will be responsible for TFRP purposes if they had the duty to pay or collect the trust fund taxes and they had the power to ensure the trust fund taxes were collected, accounted, and/or paid.
An individual will be deemed to have intentionally failed to pay or collect trust fund taxes if they were aware (or should have been aware) of the unpaid trust fund taxes and they willfully disregarded (or were plainly indifferent to) the trust fund tax obligation. There are two key takeaways here.
First, TFRP liability isn’t limited to business owners or even employees of the business. Anyone who knew about the unpaid trust fund taxes and had the authority to do something about it could potentially be liable. This includes:
- An executive or officer of the business
- The business owner or shareholder
- A payroll manager
- A third-party payroll service provider
- A lower-level employee with authority to disburse business funds.
Second, evil or malicious intent isn’t required for TFRP liability. If your reason for not paying the trust fund taxes was that you needed that money to pay your employees or pay your business’s utility bills, that still qualifies as willfulness.
Signs You Could Be at Risk
The following is a list of responsibilities and situations that could indicate you’re at risk for the TFRP:
- You have check-signing authority.
- Your job duties include ensuring your organization’s taxes are collected and paid.
- You have access to your organization’s bank accounts.
- You’re responsible for paying your organization’s bills.
- You have the power to hire and/or fire employees.
- You sign the quarterly payroll tax returns.
This isn’t information the IRS will always have access to. Therefore, before the IRS can assess the TFRP against someone, the IRS needs to conduct an investigation. The most critical component of this investigation is the Form 4180 interview.
The TFRP Investigation Process and the Form 4180 Interview
If you’re facing the prospect of a trust fund recovery penalty, you’ll most likely have a revenue officer handling your case. The revenue officer starts the TFRP investigation by asking your business to submit financial documents and records that could reveal the identities of potential responsible persons. Some of these records can include:
- Bank signature cards
- Canceled checks
- Payroll checks
- Loan documents
- Business expense payments
After reviewing these documents, the revenue officer creates a list of people to interview. During these interviews, the revenue officer will ask questions to obtain the information needed to complete IRS Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes.
The Form 4180 Interview
If the revenue officer handling your TFRP case suspects you of being a responsible person, they will ask you to voluntarily submit to the Form 4180 interview. Make sure you respond, as ignoring the request can put you at risk of facing a summons.
Ideally, you should be working with a licensed tax professional at this point. An experienced professional may be able to get you out of the interview. If you’re a responsible person and understand that you’re liable for the TFRP, we can work with you to prevent an in-person or telephone interview. We do this by having you complete and sign Form 4180. We’ll then send it to the revenue officer. Although they do not like this approach, they generally will accept it and not insist on conducting their own interview.
How to prepare for the 4180 interview
If you agree to the 4180 interview, you should do at least two things beforehand.
First, hire an IRS-authorized representative to go with you to the meeting. Form 4180 interviews can get contentious, with the revenue officer asking accusatory and/or leading questions.
Second, you should prepare for the interview. A tax professional can assist with this in the following ways:
- Anticipate the questions you’re likely to be asked and the best ways to answer them.
- Provide details that support the position that you had limited authority to make financial decisions for your organization.
- Identify the TFRP defenses you need to bring to the revenue officer’s attention.
- Help you avoid oversharing information with the revenue officer.
What to expect during the interview
As hinted at earlier, Form 4180 interviews aren’t always the most pleasant experiences. In other words, you should assume that before the interview begins, the revenue officer already believes you’re liable for the TFRP and that the burden is on you to convince them otherwise. That’s why representation is so critical.
At the conclusion of the interview, you’ll be asked to sign Form 4180. Before you do so, carefully examine it for accuracy and completeness. Ideally, you’ll have a tax professional with you who can help.
What happens after the interview
In some cases, the revenue officer may want additional information after the interview. If this happens, you can expect the revenue officer to send you a list of additional documents they need you to produce.
After completing all of the 4180 interviews of each suspected responsible person, the revenue officer decides who should be liable for the TFRP and sends them the appropriate notices. If the revenue officer concludes you’re liable for the TFRP, you can expect to receive IRS Letter 1153 (DO) and Form 2751.
Letter 1153 (DO)
This is the proposed TFRP assessment. If you disagree with it, you have sixty days to file a TFRP assessment appeal. If you have additional information you want to provide, you can send it to the person listed at the top of Letter 1153 (DO). Alternatively, if you agree with the assessment, you can sign Form 2751 or simply let the 60 days run out.
Form 2751
This form summarizes the trust fund taxes you should have collected and/or remitted to the IRS. If you disagree, you have 60 days to appeal – check the deadline carefully to ensure you don’t miss it.
You can sign the form to indicate that you agree. But even if you do so, the IRS cannot take action until the 60 days have passed, and during that time, you still have appeal rights.
What Happens If You’re a Responsible Person
If you’re found to be a responsible person for TFRP purposes, you have the duty of ensuring that the entire trust fund tax debt gets paid. This is true even if there are other responsible individuals in your organization, as you’re all jointly and severally liable for the total TFRP amount.
Joint and several liability means the IRS can collect the TFRP from all of the responsible persons, or just one of them, regardless of their level of fault in the trust fund tax collection failure.
Ideally, the full penalty gets paid in one lump sum, but this is often difficult to do. Instead, you may need to make arrangements with the IRS to pay it off over time with an installment agreement or offer in compromise.
If you don’t pay the full amount or make other payment arrangements with the IRS, you can expect the IRS to begin the tax collection process, such as filing a lien on your property or levying your assets with a bank levy or with wage garnishment.
Protect Yourself Against the TFRP
If you’re facing the possibility of having to pay the TFRP, the first thing you want to do is consult with an experienced TFRP tax professional. Your tax representative can formulate the best defenses to the TFRP, as well as identify the evidence necessary to show that you lacked the necessary authority, knowledge, or willful intent. If a TFRP has already been assessed against you, your tax professional can help you appeal the assessment or find ways to pay it off without having to deal with IRS enforcement actions.
To get started, contact the East Coast Tax Consulting Group, either online or by calling (866) 550-7655 for a free consultation. The sooner you contact us, the more options you’ll have available and the higher your chances of avoiding the TFRP (or limiting what you owe).
Trust Fund Recovery Penalty FAQs
Have more questions about the TFRP? Then keep reading, check out our TFRP FAQ page for even more questions and answers, or contact us directly.
Can multiple people be assessed the same trust fund recovery penalty?
Yes, the IRS can attempt to recover the TFRP from two or more responsible persons, although the IRS can only collect the penalty once. So if two people are responsible for the TFRP and the IRS collects the entire penalty from one person, the IRS can’t also ask the other person to pay the TFRP.
However, the person who paid the entire TFRP can seek partial reimbursement from the other responsible person who didn’t pay anything.
Can I discharge my TFRP liability through bankruptcy?
No, you can’t. It used to be possible with a super discharge in a Chapter 13 bankruptcy proceeding, but that’s no longer an option for bankruptcy cases filed on or after October 17, 2005.
Does the IRS offer reasonable cause penalty abatement for the TFRP?
No, you cannot get this penalty abated due to reasonable cause. The IRS removes many penalties due to reasonable cause, which is when situations outside of your control prevented you from paying or filing on time. But unfortunately, the TFRP is not eligible for this treatment.
How long does the IRS have to assess or collect the TFRP?
Generally speaking, the IRS has three years to assess a TFRP. This clock begins on April 15th after the return was filed or the date the relevant tax return is actually filed, whichever is later. For example, if a business files its 2026 quarterly payroll returns on time on April 30th, 2026, July 31st, 2026, November 2, 2026, and February 1, 2027, the IRS can assess a TFRP related to these returns until April 15, 2030.
Once the TFRP is assessed, the IRS has 10 years to collect it, although this 10-year clock can be paused (tolled) in certain situations, which extends the original deadline (called the collection statute expiration date).