Trust Fund Recovery Penalty (Section 6672): Frequently Asked Questions

Trust Fund Recovery Penalty (Section 6672): Frequently Asked Questions

Expert guidance from Mike Habib, EA – Specializing in IRS tax representation and audit defense

What is the Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty (TFRP) under Internal Revenue Code Section 6672 allows the IRS to personally assess business taxes against individuals deemed “responsible persons.” This penalty applies when a business fails to pay over employment taxes (federal income tax withholding, Social Security, and Medicare taxes withheld from employee paychecks).

The penalty is 100% of the unpaid trust fund taxes, making it one of the most severe penalties the IRS can impose. Unlike corporate debt, this penalty attaches directly to individuals, putting personal assets at risk.

Who Can the IRS Hold Responsible for Unpaid Payroll Taxes?

The IRS can assess the TFRP against any person who:

Was responsible for collecting, accounting for, or paying over the trust fund taxes, AND
Willfully failed to ensure those taxes were paid

Importantly, you don’t need to have both responsibilities—either one can make you liable. The IRS interprets these requirements broadly, often targeting multiple individuals within an organization.

Common “Responsible Persons” Include:

Corporate officers (President, CFO, Treasurer)
Board members with financial authority
Shareholders with significant control
Bookkeepers or office managers with payment authority
Anyone with check-signing authority over company accounts

I’m a VP of Finance But the CEO Made All Final Decisions—Can I Still Be Held Responsible?

This is one of the most common defense scenarios we handle. The answer is: it depends on your actual authority, not just your title.

Key Factors the IRS Considers:

Authority vs. Control

Did you have the practical ability to ensure taxes were paid?
Could you independently decide which creditors to pay?
Did the CEO override your financial recommendations?

Decision-Making Power

Who prioritized payments when funds were limited?
Were you executing someone else’s decisions or making your own?
Did company policies restrict your independent authority?

Knowledge and Action

When did you become aware of the unpaid taxes?
Did you protest or attempt to correct the situation?
Could you have resigned to avoid continuing responsibility?

Your Defense Strategy:

Courts have established that subordinate employees who lack independent decision-making authority may not be responsible even if they had check-signing privileges. The key cases supporting this defense include:

Hornsby v. IRS – Title and signature authority alone don’t establish responsibility
Gephart v. United States – Subordinates without independent discretion may not be liable
The “dominant shareholder/officer” doctrine – When one person exercises complete control, subordinates may escape liability

What Does “Willfully” Mean in Trust Fund Penalty Cases?

“Willful” doesn’t mean intentional or malicious. According to the IRS and courts, willfulness exists when a responsible person:

Knew (or should have known) about the unpaid taxes
Had the authority to pay the taxes
Chose to pay other creditors instead

Even paying routine operating expenses (rent, suppliers, utilities) instead of trust fund taxes can constitute willful behavior once you’re aware of the tax delinquency.

Common “Willful” Scenarios:

Continuing to operate the business after learning of tax delinquencies
Paying vendor invoices while trust fund taxes remain unpaid
Ignoring IRS notices about missing payroll tax deposits
Recklessly disregarding your duty to inquire about tax compliance

What Evidence Can Help My Defense?

Building a strong defense requires documenting your limited authority and the actual decision-making structure. We help clients gather:

Corporate Documentation:

Bylaws and resolutions defining financial authority
Board meeting minutes showing who made payment decisions
Organizational charts establishing reporting relationships
Employment agreements specifying scope of authority

Financial Records:

Bank signature cards showing actual check-signing patterns
Evidence of who prioritized creditor payments
Cash flow statements proving insufficient funds for all obligations
Records of any protests or objections you raised

Communications:

Emails showing the CEO’s control over financial decisions
Memos documenting your limited discretion
Any contemporaneous objections to non-payment of taxes
Evidence you recommended paying the taxes but were overruled

Can I Be Liable Even If I Didn’t Sign Checks?

Yes. Check-signing authority is just one factor—not a requirement. The IRS can assert the TFRP against anyone who had sufficient control over the company’s finances to ensure taxes were paid, even if they never personally signed a check.

Conversely, having check-signing authority doesn’t automatically make you liable if you lacked actual control over disbursement decisions.

What Should I Do If I Receive IRS Letter 1153?

Letter 1153 is the IRS’s formal notice proposing to assess the Trust Fund Recovery Penalty against you personally. Time is critical—you have only 60 days to respond.

Immediate Steps:

Don’t ignore it – The penalty won’t go away, and the IRS will assess it if you don’t respond
Gather documentation – Begin collecting evidence of your limited authority
Request Form 2751 – Submit a detailed written response challenging your designation as a responsible person
Consider Appeal Rights – You may request a Collection Due Process (CDP) hearing

What We Do for Clients:

Conduct detailed interviews to establish your actual role and authority
Analyze corporate structure and decision-making processes
Prepare comprehensive Form 2751 responses with supporting evidence
Represent you in IRS appeals and hearings
Negotiate settlements when multiple parties share responsibility
Explore collection alternatives if some liability remains

Can the Penalty Be Negotiated or Reduced?

Yes, several resolution options exist:

Shared Responsibility:

When multiple individuals are responsible, the IRS may agree to reduce your portion of the penalty, especially if another person (like the CEO) had primary control.

Offer in Compromise:

If the penalty is assessed and you cannot pay in full, you may qualify for an Offer in Compromise based on your personal financial situation.

Currently Not Collectible Status:

If you lack the means to pay, we can request temporary relief from collection activities.

Penalty Abatement:

In limited circumstances, reasonable cause may support partial penalty relief, though this is difficult with TFRP cases.

How Does This Affect My Personal Assets?

Once assessed, the TFRP becomes your personal tax debt. The IRS can:

File federal tax liens against your property
Levy your bank accounts and wages
Seize assets to satisfy the debt
Offset tax refunds

The penalty survives bankruptcy in most cases, making early resolution critical.

What About State Trust Fund Penalties?

California and other states have similar penalties for unpaid state payroll taxes:

California Agencies:

FTB (Franchise Tax Board) – State income tax withholding
EDD (Employment Development Department) – Unemployment and disability insurance
CDTFA (California Department of Tax and Fee Administration) – Sales tax, which can include personal liability provisions

State penalties often mirror federal rules but may have different procedures and timelines. We represent clients in both federal and state trust fund penalty cases.

What’s My Deadline to Challenge the Penalty?

Critical Deadlines:

60 days from Letter 1153 to file Form 2751 response
30 days after assessment to request Collection Due Process hearing
2 years from payment date to file refund suit (if you paid the penalty and later challenge it)

Missing these deadlines can eliminate your appeal rights and force you into litigation, which is significantly more expensive.

Should I Pay the Penalty and Sue for a Refund?

Some taxpayers choose to pay the penalty for one employee’s trust fund taxes (called the “divisible tax” strategy) and then sue for a refund. This approach:

Advantages:

Stops collection activities immediately
Preserves your right to challenge the assessment in court
May be strategic if you have strong evidence but IRS appeals are unsuccessful

Disadvantages:

Requires paying substantial money upfront
Litigation is expensive and time-consuming
No guarantee of winning in court

We help clients evaluate whether this strategy makes sense for their specific situation.

Can I Represent Myself in a Trust Fund Penalty Case?

While you have the right to self-representation, TFRP cases are complex and high-stakes. The IRS has experienced revenue officers and attorneys handling these cases daily.

Why Professional Representation Matters:

Technical complexity – Understanding case law, IRS procedures, and defense strategies
Evidence development – Knowing what documentation strengthens your case
Negotiation leverage – IRS is more willing to settle with experienced representatives
Procedural expertise – Meeting deadlines and navigating appeals processes
Asset protection – Preventing liens and levies during the resolution process

As an Enrolled Agent, I’m authorized to represent taxpayers before the IRS and have handled hundreds of trust fund penalty cases nationwide.

How Can Mike Habib, EA Help With My Trust Fund Penalty Case?

I specialize in defending individuals against Trust Fund Recovery Penalties and have successfully resolved cases involving:

Corporate officers with limited actual authority
Employees who lacked decision-making power
Business owners facing personal liability for company debts
Multi-party situations requiring negotiated settlements
Both federal (IRS) and California state (FTB, EDD, CDTFA) trust fund penalties

My Approach:

Comprehensive case analysis – Detailed review of your role, authority, and the company’s financial situation
Evidence gathering – Identifying and organizing documentation to support your defense
Strategic representation – Preparing Form 2751 responses, handling IRS appeals, and negotiating settlements
Nationwide service – Representing clients throughout the United States and Americans living overseas

Get Expert Help With Your Trust Fund Penalty Case

If you’ve received IRS Letter 1153 or are concerned about potential TFRP liability, time is critical. Don’t face the IRS alone.

Contact Mike Habib, EA today for a confidential consultation.

With offices in Los Angeles and serving clients nationwide, I provide experienced representation in federal IRS and state tax matters, including Trust Fund Recovery Penalty defense.

This article is for informational purposes only and does not constitute legal or tax advice. Each case is unique and requires individual analysis. Consult with a qualified tax professional about your specific situation.