Trust Fund Recovery Penalty: What Business Owners Need to Know
By Martina V.
If your business withheld payroll taxes but didn't remit them, the IRS can assess that trust-fund portion against you personally. The Trust Fund Recovery Penalty is one of the most serious tools the agency uses.
Trust Fund Recovery Penalty: What Business Owners Need to Know
If your business withheld payroll taxes from employees but didn't turn them over to the IRS, the unpaid "trust fund" portion can be assessed personally against the people responsible for the decision. This is the Trust Fund Recovery Penalty (TFRP) — and it's one of the most serious collection tools the IRS uses against small business owners.
What the trust fund portion is
Payroll taxes have two parts:
- Trust fund taxes — the income tax and Social Security/Medicare withheld from employees' paychecks. These are funds held in trust for the government.
- Employer portion — the matching Social Security and Medicare the business itself owes.
The TFRP applies only to the trust fund portion — the money withheld from employees — plus interest. The employer's own matching share is not subject to TFRP (though it's still owed by the business).
Who can be held responsible
The IRS can assess the TFRP against any person who:
- Is responsible for collecting, accounting for, or paying the trust fund taxes, and
- Willfully failed to do so
"Responsible person" is broadly defined — it can include owners, officers, bookkeepers, or anyone with authority over financial decisions. "Willfully" means you knew the taxes weren't being paid and chose to pay other creditors instead.
How the IRS investigates
The IRS conducts interviews (often via Form 4180) to determine who was responsible and willful. The answers given in these interviews matter enormously — they can establish or defeat personal liability. This is why anyone contacted about a TFRP investigation should speak with a representative before responding.
Resolving a TFRP assessment
Once assessed, the TFRP is a personal liability — it can't be discharged in bankruptcy for several years and the IRS can collect it from personal assets. Resolution options include:
- Installment agreements on the personal assessment
- Offers in Compromise if collection potential is limited
- Penalty abatement in narrow circumstances
- Negotiating the responsible-person determination before assessment, when possible
The strongest defense is early: if the IRS is investigating but hasn't yet assessed, there may be room to influence who is named and how the liability is structured.