The income and social security taxes an employer withholds from the wages of employees are called “trust fund” taxes because they are in theory held in trust for the government. But when business owners encounter financial trouble, they sometimes fail to pay these withheld taxes – – not because of any plan to “steal” the money from the government, but because you just can’t pay the money you don’t have. The intention is to catch up on the payroll taxes when there is enough money to do so. But often this turns out to be an unfulfilled hope.

The IRS is very aggressive in pursuing unpaid payroll taxes. The Service is quite willing to prosecute those who willfully fail to file payroll tax returns or to pay payroll taxes. But more often the IRS seeks to collect the unpaid taxes from anyone who had anything to do with running the company, particularly those who made the financial decisions or handled the books or signed the checks.

This is done by assessing the “trust fund recovery penalty,” or TFRP. Corporate officers, directors, stockholders, and employees are normally protected from personal liability for the debts of their corporations. But the TFRP is assessed directly against the so-called “responsible persons” in their individual capacity, piercing the corporate veil.

Unpaid taxes is a particularly difficult problem. The amounts are often huge. And unlike income taxes, the TFRP is not dischargeable in bankruptcy. Every entrepreneur who starts a business believes it will succeed. The reality, however, is that small businesses frequently fail. When that happens, most debts can be left to die with the corporate shell of the defunct business, and the entrepreneur can live to fight another day. But the TFRP can thwart any efforts to rebuild and start over after the demise of a failed business, and thus must be resolved, often through an offer in compromise.

Often the IRS assesses the TFRP, or threatens to assess it, against not just the owners of the business, but also its accountants or bookkeepers or clerical staff, particularly if they had the authority to sign checks. Although not supported by the law, many IRS Revenue Officers simply assert the penalty against anyone who signed checks or had the authority to sign checks. As a result, we are often called upon to protest the assertion of the penalty against accounting clerks, folks who are named as officers merely for the convenience of the person who really runs the business, the spouses of business owners, or those who really are officers or key employees but who have duties completely unrelated to the financial management of the business. We have handled many of these cases, and can vigorously defend you against the assertion of the penalty.

In other cases, we are retained to get the TFRP removed months or years after it is assessed. This can happen when a lien filed long ago prevents the sale of a house, or when the IRS threatens to commence enforced collection action. The penalty can be challenged by paying the amount of unpaid taxes for one employee for a single withholding tax quarter and then filing a refund claim. The Service often agrees and removes the penalty. But a denial of the refund claim gives us access to the appeals process, and if necessary, to court. If you would like assistance contesting a threatened or previously assessed TFRP, please contact us by telephone or email.

Contact Burton J Haynes in Fairfax, VA.


The Trust Fund Recovery Penalty, published by the Maryland Society of Accountants in “The Freestate Accountant,” as part of Mr. Haynes’ series on “Dealing with the IRS Collection Divison.”

Internal Revenue Manual Trust Fund Compliance Handbook


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