Who this is for
- Owners, officers, partners and managers of a business with unpaid payroll tax
- People an IRS revenue officer has asked to meet or to complete a financial statement
- People who received an IRS letter proposing the penalty
Not covered here
- Whether any one person is responsible or willful
- Missed deposits, late Forms 941 and relief from payroll penalties
- Payment plans and liens on the business's own balance
- State payroll tax and unemployment penalties
- Collected excise taxes and railroad retirement tax, which the penalty also reaches
Can the IRS make me pay my business's payroll taxes personally?
It can, through the trust fund recovery penalty (TFRP). Trust fund taxes are the income tax and employees' Social Security and Medicare tax withheld from pay, held in trust until deposited (IRS). Under section 6672, a person required to collect and pay over a tax who willfully does not can owe a penalty equal to the tax not collected or paid over. The penalty is personal. The IRS generally pursues it when the business cannot pay right away, but the statute does not require that, and the business does not have to have closed (IRS; Publication 594). Willfully failing to collect or pay over the tax can also be a felony (section 7202), and the IRS may refer a case to the Department of Justice (Publication 594).
Two tests must both be met: the person was responsible and willful. Each turns on facts, which is why a revenue officer interviews people (IRS manual, IRM 5.7.3; IRM 5.7.4).
What makes a case not simple:
- Payroll returns are unfiled, or the records do not match the bank or the IRS balance, and a meeting is set. The unpaid trust fund amount comes from those returns and records, so test them before the meeting. The IRS has no time limit to assess the penalty for a period until a return for it is filed (see the section on unfiled returns).
- More than one owner or officer. The IRS can assess each responsible person for the full amount, but collects it only once (IRM 5.7.3).
- A revenue officer is assigned. Expect an interview, a document request and financial statements.
- The legal form. A sole proprietor's unpaid payroll tax is already their own debt (IRS), so the penalty matters mainly for others. A single-member LLC is a separate employer for payroll tax (IRS), so its owner can face the penalty (IRM 5.7.3). General partners answer under state law for all of a partnership's debts, so the IRS usually assesses them in that role, not through the penalty; in a limited liability partnership they may not, and then the penalty can reach a partner (IRM 5.17.7).
Before the meeting:
- Gather payroll returns and reports, bank statements and signature cards, who signed checks, and every IRS letter (see the section on records).
- Check that each quarter's return matches the payroll records, deposits and bank.
- Decide whether a representative will attend with you (see the section on representatives).
Which unpaid payroll taxes does the penalty cover?
The penalty covers only the trust fund part of payroll tax: income tax withheld from employees' pay and the employees' share of Social Security and Medicare tax. It is 100% of that unpaid amount, and interest runs on it (IRS; Notice 784).
| Piece of payroll tax | In the penalty? |
|---|---|
| Income tax withheld from employee pay | Yes |
| Employees' share of Social Security and Medicare tax | Yes |
| Employer's share of Social Security and Medicare tax | No. It stays a debt of the business. |
| Federal unemployment tax (Form 940) | No |
A Form 941 total includes the employer's share, so the penalty is usually smaller than that total (IRM 5.7.4). The penalty can apply even when the tax was never withheld (Publication 15).
Who counts as a responsible person?
A responsible person has the duty and the power to direct collecting, accounting for and paying the trust fund taxes. The IRS tests status, duty and authority, not the title. It lists officers and employees of a corporation, partners and employees of a partnership, directors, shareholders, LLC members and managers, anyone with authority over how funds are spent, accountants and payroll providers (IRM 5.7.3; IRS; Notice 784).
| Fact | How the IRS treats it |
|---|---|
| An officer title, or owning shares | Cannot be the only basis |
| Authority to sign checks | Not enough alone under the IRS manual. The IRS also says a person who signs checks or can cause business funds to be spent may be responsible (Publication 15). The facts decide. |
| Deciding which creditors get paid | The IRS looks for independent judgment over the finances. A non-owner employee, one with no stock or other stake in the company, who only pays bills as directed is generally not responsible. |
| A non-owner with a real say over which creditors are paid | Can be responsible, even if an owner limited the choice about taxes |
| Hiring and firing, signing payroll returns, making deposits, or handing those jobs to someone else | The IRS checks who did them. A person with ultimate authority generally cannot avoid responsibility by delegating. |
| Leaving the business, or joining after the unpaid periods | The IRS looks at each period. Its recommendation form separates people responsible for all periods from those responsible for some, and the officer reviews appointment and resignation records (IRM 5.7.4). A person who takes control after the tax went unpaid is generally not liable for that earlier tax, except up to the funds the business had on hand when they took over and did not use to pay it (IRM 5.17.7). Bring the dates. |
| A payroll provider or professional employer organization | Can be responsible. Using one does not remove the duty of the business's own people. A certified professional employer organization is generally treated as the employer for the wages it pays, but you may also be liable for some employees (Publication 15); see when a payroll provider did not pay your taxes. |
An LLC taxed as a partnership or corporation follows the same tests. An unpaid volunteer board member of a tax-exempt organization is excluded if they serve only in an honorary capacity, take no part in day-to-day or financial operations and did not know of the failure, unless that would leave no one liable (section 6672(e)).
What does willful mean, and does paying rent, suppliers or net pay first count?
Willful means voluntary, conscious and intentional (Notice 784); no bad motive is required. A responsible person acts willfully if they were, or should have been, aware of the unpaid taxes and either disregarded the law or were plainly indifferent to it (IRS).
Paying other bills first is the pattern the IRS looks for. Notice 784 treats paying other business expenses instead of the trust fund tax, net payroll included, as willful. So paying rent, suppliers or net wages while the withheld tax stayed unpaid can meet the test for a person who knew.
The IRS also treats failing to investigate or correct after being told that withholding was not paid as meeting the willfulness element (IRM 5.7.3). Whether it applies depends on the facts.
When cash cannot cover both wages and the tax, the IRS says to split it so the tax on the wages actually paid is paid in full. Courts are split on whether reasonable cause, such as a belief that the tax was being paid, defeats willfulness; where they allow it, it is narrow (IRM 5.17.7).
A revenue officer asked to meet me: what happens at the interview (Form 4180)?
The officer is trying to complete Form 4180, the record of an interview, with each person who may be responsible. You may be asked to explain your duties and authority (IRS). The steps below follow IRM 5.7.4, which tells the officer to suspend the interview if you say you want to consult an authorized representative. The statutory right to that pause, section 7521(b)(2), does not cover an interview started by a summons.
- Setup. The officer may send Letter 3586 to set the meeting. It is done in person or by phone, and a summons can require attendance. The IRS does not give or send Form 4180 to you or your representative beforehand.
- The start. The officer explains the penalty, gives you Publication 1 and Notice 784, shows how the penalty was calculated, and sets deadlines for documents.
- The questions. Your duties, who could sign checks and returns, who decided what to pay, whether a payroll provider was used, and who else had authority. If you cannot answer, the form allows "unknown". What you say about others is recorded and can lead the officer to look at them. You sign at the end and should get a copy when feasible.
- Third parties. The IRS generally gives advance notice before contacting a bank or other third party, and you can ask for a list of those contacted (Publication 594).
- More time. The officer may ask you to sign Form 2750 to extend the time to assess. You may refuse the extension or limit it. When the deadline to assess is close, the IRS can then issue Letter 1153 on what it already has (IRM 5.7.3).
Can I bring a representative?
Yes. During collection you can be represented by an attorney, a CPA, an enrolled agent, an immediate family member, or any person enrolled to practice before the IRS. A representative files Form 2848 to appear for you and receive confidential information (Publication 594). On line 3, name the penalty itself, such as "Civil Penalty" or "Trust Fund Recovery Penalty": a power of attorney written only for your Form 1040 does not reach it (Form 2848 instructions). For a protest, the power of attorney must authorize representing you as the responsible person, not the business (IRM 5.7.6). A representative with your power of attorney can attend an interview for you, and the IRS cannot require you to come too unless it has summoned you (section 7521(c)).
Which records will the officer ask for, and what should I gather?
The IRS's core evidence is the interview, the formation papers, bank signature cards, and a sample of cancelled checks (or bank statements, for electronic payments) showing who was paid ahead of the tax (IRM 5.7.4). Gather these before the meeting.
| Record | Why the officer wants it |
|---|---|
| Forms 941 (or 944) and 940 for every period, with deposit confirmations | Shows what was reported, deposited and when. Payroll records showing what a deposit contained, and that it was on time, can lower the penalty. |
| Payroll reports by pay date: wages, income tax withheld, employee Social Security and Medicare | Separates the trust fund tax from the employer's share |
| Bank statements and cancelled checks or electronic payment records for each period; owner draws, owner loans and asset sales | The officer samples them for payments to other creditors ahead of the tax, and for diverted funds |
| Bank signature cards and records of who has online banking access | Show who could sign and move money |
| Articles of incorporation, operating or partnership agreement, minutes, officer appointments, and contracts with a payroll provider or professional employer organization | Roles, dates and who handled payroll |
| Every IRS letter and notice, with dates | The dates start deadlines and show which periods the IRS has in view |
| Your own timeline: who set pay, signed returns and chose what to pay, and when each person started or left | The questions are about duties and authority |
The IRS asks the business for records first. If they are not provided by the deadline, it can summon the business or the bank after advance notice (IRM 5.7.4).
What if payroll returns are unfiled or the records do not match?
An unfiled payroll return leaves its period open: the IRS has no time limit to assess the penalty for it until a return is filed. Otherwise the usual limit is 3 years from the April 15 after the payroll year, or from the filing date if that is later. A return the IRS prepares for the business, or a false or fraudulent one, does not start the clock (IRM 5.7.3). A proposal letter sent before the limit ends keeps it open until at least 90 days after the letter, or 30 days after Appeals decides a timely protest (section 6672(b)(3)).
The officer's review asks whether every period is covered, including unfiled returns, and liability from IRS-prepared returns can be added to the penalty once processed (IRM 5.7.4). Filing the missing returns can raise the unpaid trust fund tax, but the IRS advises filing every return due even when you cannot pay (Publication 594). Match each quarter's return to the payroll records, deposits and bank before the meeting. For missed deposits and penalty notices, see behind on payroll taxes. For payroll accounts that will not tie out in the books, see payroll liabilities that won't clear.
What are Forms 433-A and 433-B?
Form 433-A is the financial statement for you as an individual. Form 433-B is the one for the business. The officer uses them to decide whether you can pay the penalty, and both are signed under penalties of perjury (IRM 5.7.5; Form 433-A; Form 433-B).
| Form | Who completes it | What it asks |
|---|---|---|
| 433-A | Each person the officer is investigating. A self-employed person also completes the business sections. | Household and job details; lawsuits, bankruptcy, trusts; larger asset transfers for less than full value in the past 10 years; assets; monthly income and expenses |
| 433-B | Every business other than a sole proprietorship, signed by an officer, partner or LLC member | Employees, payroll and deposit frequency; each owner, officer or member and whether responsible for depositing payroll taxes; payroll provider; lawsuits, bankruptcy, related-party loans; assets, liabilities, income and expenses |
The IRS may ask for proof of what you report, such as tax returns, profit and loss statements, and bank and loan statements. A wage earner whose potential penalty is under a set amount may be asked for the shorter Form 433-F instead (IRM 5.7.5). If you decline to complete a 433-A, the IRS can use other sources or, in some cases, a summons (IRM 5.7.5).
What is the letter proposing the penalty (Letter 1153), and how long do I have?
Letter 1153, sent with Form 2751, is the IRS's written proposal to assess the penalty against you. To assess means to record it formally against you. You have 60 days from the date of the letter to appeal, or 75 days if it is addressed outside the United States (IRS). By law the IRS must wait at least 60 days after the notice before it demands payment, unless it finds that collection is in jeopardy (section 6672(b)). Your choices, from IRM 5.7.6 unless linked:
| Your choice | What it does |
|---|---|
| Sign and return Form 2751 | You agree to the assessment. The IRS does not treat it as final until the response period and five more days pass, and signing does not end your appeal rights. |
| Tell the officer within 10 days | The letter invites this if you disagree, have more information or want to resolve it informally. It does not replace the written appeal; to keep your appeal rights, still appeal by the deadline. |
| Appeal in writing | Send it by certified or registered mail by the last day. A small case request, a short statement of the issues, works when each period and the total are $25,000 or less; above that, a formal written protest (IRM 5.7.6; Publication 5). Appeals usually turn on responsibility, willfulness or how the penalty was calculated. |
| No response | The IRS assesses the penalty and sends a notice and demand for payment (IRS). |
Once the letter is delivered, the IRS freezes refunds on your account (IRM 5.7.4).
How is the amount worked out, and can it shrink?
The penalty equals the unpaid trust fund tax for each quarter in the proposal: unpaid income tax withheld plus the employees' share of Social Security and Medicare (IRS). The officer shows you the calculation, with a sheet listing every transaction for each period. Check it against your records. It can shrink when (IRM 5.7.4):
- Payroll records show what a deposit contained and that it was on time.
- A voluntary payment was designated to the trust fund share in writing when made. Designated payments go where designated; undesignated ones go first to the employer's share, then to the trust fund share, then to penalties and interest.
- A person was responsible for only some periods, for example after joining or before leaving.
- Someone else pays. Each responsible person is liable for the whole unpaid amount, but the IRS collects it only once, from the business, one person or a mix (IRM 5.7.3). A person who pays more than their share can seek repayment from others who are also liable, in a separate court proceeding (section 6672(d)).
Interest on the penalty runs from the date of the notice and demand for payment, and is not charged if you pay within the short period the statute allows (21 days for most amounts) (section 6601(e)(2)).
Can I avoid the penalty by paying, and what happens after it is assessed?
The IRS describes paying as a way to avoid assessment. When it cannot collect from the business, it tells responsible people they can pay the full unpaid withheld tax for the business or have the penalty assessed (IRM 5.7.4; Publication 594). The payment must be voluntary, and the designation specific, in writing and made when you pay: the amount, the business name and EIN, and each period. If you pay with something other than a business check, you give a signed statement. A general "trust fund" note with no periods does not count (IRM 5.7.4).
A business that keeps an approved in-business installment agreement can lead the IRS to hold off assessing. Unless the business qualifies for the express in-business trust fund plan, which needs no penalty decision, the officer can still interview each person, collect financial statements and ask for a Form 2750 waiver; a person who refuses it can still be assessed if the IRS finds the penalty collectible. A default sends the penalty forward, and a corporation cannot direct plan payments to the trust fund share (IRM 5.7.4). For plans and liens on the business's own balance, see IRS payment plans for business tax debt.
After assessment:
- Collection. The IRS can file a federal tax lien (a legal claim against your property) or levy (seize money or property, such as a bank account), including personal assets (IRS; Publication 594). Before a levy it must send written notice of your right to a hearing, at least 30 days ahead, and you ask for the hearing within that time (section 6330); a lien filing carries a hearing right too. Because Letter 1153 already let you appeal the amount, a hearing generally cannot reopen it (IRM 5.7.4). The IRS generally has 10 years from assessment to collect (IRS).
- Bankruptcy. The business's bankruptcy does not stop the IRS from assessing and collecting the penalty from responsible people who are not in bankruptcy themselves. The IRS generally holds off while the business's Chapter 11 plan pays the trust fund tax in full and is not in default. A person's own bankruptcy generally does not discharge the penalty (IRM 5.17.7).
- If you cannot pay in full. The officer decides from your financial statement. The options the IRS lists include an installment agreement or currently-not-collectible status, which delays collection while you cannot pay (IRM 5.7.6; Publication 594).
- If you still dispute it. The route is a refund claim and, if it is denied, a court case. For each quarter, pay the part of the penalty tied to one employee and file a separate Form 843 for that period; the IRS generally considers only claims filed within 2 years after the payment (IRM 5.7.7). If you sue, the government can counterclaim for the unpaid rest. To hold off collection of the rest, the payment, the claim and a bond must all come within 30 days of the demand, and suit must start within 30 days after a denial or the hold ends (section 6672(c)). The deadlines are strict, so get help before the demand arrives.
Example
These examples are illustrative; all figures are in US dollars.
Two members, one signer
A catering LLC taxed as a partnership, with two members, withheld US$40,000 of income tax and employees' Social Security and Medicare over two quarters (US$18,000, then US$22,000) and paid none of it. One member signed every check. The IRS can propose the penalty against each responsible person. Signing the checks is one fact it weighs, not the whole test; the other member's authority over the money matters too. It collects the US$40,000 once, from the LLC or any responsible member. A member who pays more than their share can seek repayment from the other, if the other is also liable.
The bookkeeper
A bookkeeper who owns none of the company and is not related to an owner pays the bills the owner hands over, and asks the owner which to pay when cash is short. The IRS manual treats that as a ministerial act, so such an employee is generally not a responsible person (IRM 5.7.3). A bookkeeper who decides which creditors are paid, or who is an owner or a relative of one, is judged on the facts.
Net pay paid, tax unpaid
An owner paid US$25,000 of net wages in a quarter while US$8,000 of withheld tax went unpaid. Notice 784 treats paying net payroll instead of the tax as willful. If the owner is also a responsible person, the penalty is US$8,000, the unpaid trust fund tax, not the wages. Publication 594 says the owner can avoid the assessment by paying the trust fund tax personally; the IRS manual asks for a written designation of the US$8,000 to that quarter.
Different for you?
- Payroll returns are unfiled, or payroll records do not match the bank and the IRS balance, and a meeting is set. The unpaid trust fund balance rests on those returns and records. Work out which returns and payroll accounts to fix first, before the interview, with business tax help or catch-up bookkeeping, and see catching up on unfiled business returns.
- You missed deposits or got a payroll penalty notice: see behind on payroll taxes.
- A payroll provider was supposed to deposit the tax: see when a payroll provider did not pay your taxes.
- Your payroll liability accounts will not clear: see payroll liabilities that won't clear.
- The business cannot pay its balance: see IRS payment plans for business tax debt.
- You are not sure a letter is real, or the IRS is also auditing the business return: see an IRS notice to your business and an IRS audit of a small business.
- You run the business with no LLC or corporation (a sole proprietor): the payroll tax is already your own debt; start with behind on payroll taxes. A one-owner LLC is a separate employer for payroll tax, so the sections above apply to its owner.
Figures on this page
| Figure | Value | Source |
|---|---|---|
| Deadline to appeal a proposed trust fund recovery penalty From the date of the proposed assessment letter when addressed within the United States | 60 days | IRS: Employment taxes and the Trust Fund Recovery Penalty Checked |
| Trust fund recovery penalty as a share of unpaid withheld tax Applies to the unpaid trust fund tax of a responsible person who acted willfully under IRC section 6672 | 100% | IRS: Publication 15, Employer's Tax Guide Checked |
| General trust fund recovery penalty assessment period From the succeeding April 15 for timely employment tax returns, or actual later filing; exceptions apply | 3 years | IRS: Trust fund recovery penalty assessment period Checked |
| Deemed annual employment-tax return filing date for assessment In the succeeding calendar year; actual later return filing starts the assessment period later; exceptions can suspend or eliminate the limit | April 15 | IRS: Trust fund recovery penalty assessment rules Checked |
| Trust fund recovery penalty: assessment period kept open after the proposal letter Section 6672(b)(3): if the proposal notice is mailed or delivered before the assessment period ends, the period does not expire before the later of this time after the notice, or the time in us.tfrp.assessment-extension-after-appeal | 90 days | US Code: Section 6672, failure to collect and pay over tax Checked |
| Trust fund recovery penalty: assessment period kept open after Appeals decides a timely protest Section 6672(b)(3)(B): if there is a timely protest, the assessment period does not expire before this time after the final administrative determination | 30 days | US Code: Section 6672, failure to collect and pay over tax Checked |
| Deadline to appeal a proposed trust fund recovery penalty when letter is addressed abroad From the date of the proposed assessment letter addressed outside the United States | 75 days | IRS: Employment taxes and the Trust Fund Recovery Penalty Checked |
| Trust fund recovery penalty: minimum wait between the proposal letter and notice and demand for payment Section 6672(b)(2): the written proposal notice must come at least this long before notice and demand; the wait does not apply if the IRS finds collection is in jeopardy | 60 days | US Code: Section 6672, failure to collect and pay over tax Checked |
| Trust fund recovery penalty: time to contact the revenue officer after Letter 1153 Letter 1153 invites the responsible person to contact the revenue officer within this time after delivery to disagree, add information or resolve the matter informally; it does not replace the written appeal | 10 days | IRS: Internal Revenue Manual 5.7.6, Trust fund penalty assessment action Checked |
| Trust fund recovery penalty: largest proposed amount for a small case appeal request Per Letter 1153 appeal: a small case request works when each tax period and the total proposed amount are this much or less; above it, a formal written protest is required | $25,000 | IRS: Internal Revenue Manual 5.7.6, Trust fund penalty assessment action Checked |
| Assessable penalty: time to pay after notice and demand without interest Section 6601(e)(2)(A): no interest if paid within 21 calendar days of notice and demand (10 business days if the amount is $100,000 or more); otherwise interest runs from the notice and demand | 21 days | US Code: Section 6601, interest on underpayment, nonpayment, or extensions of time for payment Checked |
| Collection due process: notice before a first levy, and time to request the hearing Section 6330(a)(2) and (3): the levy notice is given at least this long before the first levy, and the person may request a hearing during that period | 30 days | US Code: Section 6330, notice and opportunity for hearing before levy Checked |
| General federal tax collection period after assessment Generally starts at assessment; statutory suspensions and extensions can apply | 10 years | IRS: Time IRS can collect tax Checked |
| Trust fund recovery penalty: how soon a refund claim must follow the required payment IRM 5.7.7.5: the IRS generally considers a penalty refund claim only if it is filed within this time after the required payment was made | 2 years | IRS: Internal Revenue Manual 5.7.7, TFRP collection after assessment Checked |
| Trust fund recovery penalty: time to pay, claim a refund and post a bond to hold off collection Section 6672(c)(1): after notice and demand, the payment, the refund claim and the bond must all come within this time to stop levy and court collection of the rest of the penalty | 30 days | US Code: Section 6672, failure to collect and pay over tax Checked |
| Trust fund recovery penalty: time to sue after a refund claim is denied Section 6672(c)(2): the hold on collection ends if suit is not begun in district court or the Court of Federal Claims within this time after the claim is denied | 30 days | US Code: Section 6672, failure to collect and pay over tax Checked |
Primary sources
- IRS: Employment taxes and the Trust Fund Recovery Penalty (TFRP)
- IRS: Notice 784, Could You be Personally Liable for Certain Unpaid Federal Taxes?
- US Code: Section 6672, failure to collect and pay over tax
- US Code: Section 6330, notice and opportunity for hearing before levy
- US Code: Section 7202, willful failure to collect or pay over tax
- US Code: Section 6601, interest on underpayment, nonpayment, or extensions of time for payment
- US Code: Section 7521, procedures involving taxpayer interviews
- IRS: Internal Revenue Manual 5.7.3, TFRP responsibility, willfulness and assessment period
- IRS: Internal Revenue Manual 5.7.4, Investigation and recommendation of the TFRP
- IRS: Internal Revenue Manual 5.7.5, Collectibility determination
- IRS: Internal Revenue Manual 5.7.6, Trust fund penalty assessment action
- IRS: Internal Revenue Manual 5.7.7, TFRP collection after assessment
- IRS: Internal Revenue Manual 5.17.7, Liability of third parties for unpaid employment taxes
- IRS: Publication 594, The IRS Collection Process
- IRS: Publication 5, Your Appeal Rights and How to Prepare a Protest
- IRS: Instructions for Form 2848, Power of Attorney and Declaration of Representative
- IRS: Publication 15, Employer's Tax Guide
- IRS: Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals
- IRS: Form 433-B, Collection Information Statement for Businesses
- IRS: Sole proprietorships
- IRS: Single member limited liability companies
- IRS: Time IRS can collect tax
About this guide
Published by Cloud Accounting under standing professional approval. This version has no separately recorded personal review. It explains general rules for the tax year shown. It is not advice for your situation.
Changes
- : First published.