Can the Trust Fund Recovery Penalty be discharged in bankruptcy?

No. The TFRP is a non-dischargeable tax debt under bankruptcy law. Filing bankruptcy does not eliminate the TFRP, and the IRS can continue collections after bankruptcy discharge.

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Trust Fund Recovery Penalty (TFRP) Defense | Strategic Planning Advisors

⚠️ Trust Fund Recovery Penalty (TFRP) Defense

The IRS can hold you personally liable for your company's unpaid payroll taxes — even if the business failed. We defend you.

📞 Fight the TFRP ← Back to IRS Problems

🚨 The Problem: You're Personally Liable for Company Payroll Taxes

If your business failed to pay payroll taxes (employee withholding for Social Security, Medicare, and federal income tax), the IRS can assess the Trust Fund Recovery Penalty (TFRP) — making you personally liable for the unpaid taxes.

⚠️ This Is NOT a "Penalty" — It's Personal Liability

Despite the name, the TFRP is 100% of the unpaid trust fund taxes — not a percentage penalty. If your company owes $100K in payroll taxes, the IRS can assess $100K against you personally.

❌ Cannot be discharged in bankruptcy (unlike most business debts)
❌ IRS can seize your personal assets — home, car, bank accounts, wages
❌ Applies even if the business closed or filed bankruptcy
❌ No statute of limitations until assessed — IRS can go back years

Who can be assessed: Business owners, officers, CFOs, bookkeepers, HR managers — anyone who was "responsible" for paying payroll taxes and "willfully" failed to pay them.

💡 Frank-ism:

"The IRS calls it a penalty, but it's really personal liability disguised as a penalty. They go after individuals when the company can't pay — and they cast a wide net."

📋 What Is the Trust Fund Recovery Penalty (TFRP)?

The TFRP (also called the "100% penalty") is codified under IRC § 6672. It applies when:

✓ A business withholds taxes from employee paychecks (Social Security, Medicare, federal income tax)
✓ The business fails to pay those withheld taxes to the IRS
✓ A "responsible person" willfully failed to pay

💰 What Taxes Trigger TFRP?

Trust Fund Taxes (employee withholding):

✓ Social Security tax (6.2% of wages)
✓ Medicare tax (1.45% of wages)
✓ Federal income tax withholding (based on employee W-4)

❌ NOT included: Employer's share of Social Security/Medicare (that's a business debt, not personal liability)

Example: If your company withheld $50K from employees but didn't pay the IRS, the TFRP is $50K — assessed personally against responsible persons.

⚖️ Why "Trust Fund"?

The withheld taxes are considered "trust funds" — money held in trust for the government. When a business withholds taxes from employee paychecks, that money never belonged to the business — it was always the government's money.

The IRS views failure to pay as theft — and they pursue responsible persons aggressively.

👤 Who Can Be Assessed the TFRP?

The IRS uses two tests to determine if you're liable:

TEST 1

Responsible Person Test

Were you "responsible" for paying payroll taxes?

The IRS looks at:

✓ Authority: Did you have authority to sign checks or direct payments?
✓ Control: Did you control financial decisions?
✓ Duties: Were you responsible for payroll, accounting, or tax compliance?
✓ Title: Were you an owner, officer, CFO, controller, or bookkeeper?

⚠️ You don't need to be the owner. Bookkeepers, CFOs, HR managers, and even outside accountants can be held liable if they controlled payments.

TEST 2

Willfulness Test

Did you "willfully" fail to pay the taxes?

"Willful" doesn't mean intentional or malicious — it simply means:

✓ You knew (or should have known) payroll taxes were owed
✓ You had the ability to pay them
✓ You chose to pay other creditors instead (vendors, rent, loans, etc.)

Example: You paid suppliers to keep the business running instead of paying the IRS → willful failure (even if done to save the business).

🎯 Common "Responsible Persons" the IRS Targets:

✅ Business owners (majority shareholders, partners, sole proprietors)
✅ Corporate officers (CEO, CFO, President, Treasurer)
✅ Bookkeepers (if they had check-signing authority or directed payments)
✅ Accountants/CPAs (if they controlled the company's finances beyond advisory role)
✅ HR managers (if they were responsible for payroll processing)
✅ Board members (if they had authority over financial decisions)
⚠️ Multiple people can be assessed — the IRS can (and does) go after several responsible persons for the full amount

💼 Lori-ism:

"The IRS casts a wide net. We've seen them assess bookkeepers who thought they were just following the owner's orders. If you signed checks or directed payments, you're at risk."

🕒 How the IRS Assesses the TFRP (Timeline)

⏱️ TFRP Assessment Timeline:

IRS identifies unpaid payroll taxes (often during audit or collection)
IRS sends Letter 1153 or Form 2751 (TFRP investigation begins)
IRS interviews responsible persons (Form 4180 interview — they're gathering evidence against you)
IRS issues Letter 1153 (DO) ("Proposed Assessment" — you have 60 days to respond)
If no response → IRS assesses TFRP (Letter 3172 or CP504 — assessment is final)
Collections begin (levies, liens, garnishments)

🚨 CRITICAL: The 60-Day Window

Once you receive the Proposed Assessment letter, you have 60 days to:

✅ File a protest (challenge the assessment before it's finalized)
✅ Request an Appeals conference
✅ Present defenses (prove you weren't responsible or it wasn't willful)

⚠️ If you miss the 60-day deadline:

❌ TFRP is assessed — no more appeals
❌ You must pay in full and file a claim for refund to challenge (requires $$ upfront)

Frank-ism: "The 60-day window is your only chance to fight before the IRS locks you in. Don't wait."

🛡️ How We Defend You Against the TFRP

1. Challenge "Responsible Person" Status

Argument: You were not a responsible person — you didn't have authority or control over financial decisions.

Evidence we gather:

✓ Corporate bylaws (who had signatory authority?)
✓ Board resolutions (who approved payments?)
✓ Bank records (who actually signed checks?)
✓ Witness statements (who made financial decisions?)

✅ Works best for: Employees, minority shareholders, board members with no operational role

2. Challenge "Willfulness"

Argument: You did not willfully fail to pay — you were unaware, misled, or had no ability to pay.

Defenses:

✓ Lack of knowledge: You didn't know payroll taxes weren't being paid (bookkeeper handled it)
✓ Reasonable cause: You relied on a professional (accountant, payroll company) who failed
✓ No funds available: The business had zero cash to pay anyone (not just choosing other creditors)
✓ Paid all you could: You made partial payments to the IRS when funds were available

⚠️ Hard to prove: IRS assumes that if the business paid anyone (vendors, rent, etc.) after payroll taxes were due, it was willful.

3. Prove Another Person Was Responsible

Argument: Someone else was the responsible person — not you.

Strategy:

✓ Identify the actual decision-maker (e.g., majority owner who controlled all finances)
✓ Provide evidence that they directed payments to other creditors
✓ Show you had no authority to override their decisions

⚠️ Caution: This doesn't eliminate the TFRP — it shifts it. The IRS may still assess you if multiple people were responsible.

4. Negotiate a Settlement (Offer in Compromise)

If you can't avoid the TFRP: Negotiate to settle for less than you owe.

✓ TFRP is eligible for Offer in Compromise (OIC)
✓ IRS evaluates your ability to pay (income, assets, expenses)
✓ Typical settlements: 10–30% of the debt

→ Learn more about Offer in Compromise

5. Request Currently Not Collectible (CNC) Status

If you can't pay: The IRS can place your account in Currently Not Collectible (CNC) status.

✓ Collections stop (no levies, garnishments)
✓ Debt remains, but IRS doesn't pursue you while you're in hardship
✓ Eventually, the 10-year statute expires and debt is forgiven

⚖️ Frank-ism:

"TFRP defenses are hard — but not impossible. The key is acting fast during the 60-day window and building a strong case with evidence, not just testimony."

🛠️ How We Fight the TFRP for You

1

Emergency Response (If Within 60-Day Window)

If you received a Proposed Assessment letter, we act immediately:

✓ File a written protest within 60 days
✓ Request an Appeals conference
✓ Halt the assessment process

⚠️ This is time-sensitive. If the 60 days have passed, we pivot to post-assessment strategies (pay + refund claim or collection alternatives).

2

Investigate & Build Your Defense

We gather evidence to challenge the TFRP:

✓ Corporate documents: Bylaws, resolutions, ownership structure
✓ Bank records: Who signed checks? What payments were made?
✓ Payroll records: When were taxes withheld vs. paid?
✓ Form 4180 interview: What did you tell the IRS? (We review for inconsistencies)
✓ Witness statements: Who actually controlled finances?

Goal: Prove you were not responsible or it was not willful.

3

Prepare & Submit Written Protest

We file a comprehensive protest with the IRS Appeals Office:

✓ Detailed legal arguments citing IRC § 6672 case law
✓ Supporting documents (corporate records, bank statements, affidavits)
✓ Evidence challenging "responsible person" or "willfulness"

Timeline: Appeals conference typically scheduled within 3–6 months

4

Appeals Conference

We represent you in a formal hearing with an IRS Appeals Officer:

✓ Present your case
✓ Cross-examine IRS evidence
✓ Negotiate (Appeals can reduce or eliminate the TFRP)

Possible outcomes:

✅ Full relief: TFRP eliminated (rare, but possible)
✅ Partial relief: TFRP reduced (e.g., allocated among multiple responsible persons)
✅ Settlement: Offer in Compromise or payment plan
❌ Denial: TFRP stands (you can appeal to Tax Court)

5

Tax Court (If Needed)

If Appeals denies your case, we can file a petition in U.S. Tax Court:

✓ No upfront payment required (unlike refund suits)
✓ Independent judge reviews your case
✓ Precedent: Many TFRP cases are won in Tax Court

⚠️ Deadline: 90 days from IRS final determination

6

Collection Alternatives (If TFRP Is Assessed)

If the TFRP stands, we negotiate:

✓ Offer in Compromise: Settle for less
✓ Installment Agreement: Monthly payment plan
✓ Currently Not Collectible: Suspend collections

→ Learn more about Payment Plans

📈 Real Result: $320K TFRP → Reduced to $0

🏗️ The Problem

Client: Minority shareholder (30%) in construction company, SE Michigan
IRS TFRP Assessment: $320,000 (unpaid payroll taxes from 2019–2021)
Threat: Lien filed; wage garnishment imminent

🔍 Our Discovery

✓ Client was minority shareholder (30%) — not majority owner
✓ Majority owner (70%) controlled all financial decisions
✓ Client had no check-signing authority (confirmed via bank records)
✓ Client was not involved in payroll — outside payroll company handled it
✓ Client wasn't aware payroll taxes weren't being paid until IRS audit (2 years after business closed)

✅ The Resolution

✅ Filed written protest within 60-day window
✅ Presented evidence: corporate bylaws, bank records, payroll company contract, witness affidavit from majority owner
✅ Appeals Officer agreed client was not a responsible person
✅ TFRP eliminated — $0 liability
✅ Lien released

$320K Proposed TFRP

$0 Final Liability

100% Relief Granted

5 Months From Protest to Resolution

🔒 The Prevention

✓ Client now works as W-2 employee in new ventures (not owner/officer)
✓ Enrolled in Annual Service Plan (ASP) for personal tax compliance

💬 Client: "I thought I was done. Frank proved I wasn't responsible — and the IRS dropped the entire $320K."

❓ Frequently Asked Questions

Can the TFRP be discharged in bankruptcy? ▼

No. The TFRP is a non-dischargeable tax debt under bankruptcy law (11 U.S.C. § 523(a)(1)).

⚠️ This means:

❌ Filing bankruptcy does not eliminate the TFRP
❌ The IRS can continue collections after bankruptcy discharge

✅ Alternative: Offer in Compromise or Currently Not Collectible status

Can the IRS assess multiple people for the same TFRP? ▼

Yes. The IRS can (and does) assess multiple responsible persons for the full amount of the TFRP.

Example: $200K TFRP → assessed against owner, CFO, and bookkeeper (all 3 liable for $200K each)

⚠️ But:

✓ The IRS can only collect once — if one person pays, the others are released
✓ You can sue co-responsible persons for contribution (reimbursement) if you pay more than your share

What if I wasn't aware the payroll taxes weren't being paid? ▼

This can be a valid defense — but you need proof.

Evidence we gather:

✓ You relied on a bookkeeper or payroll company
✓ You were not involved in day-to-day finances
✓ You had no reason to know taxes weren't being paid (no IRS notices sent to you)

⚠️ However: The IRS assumes that if you were an officer or owner, you should have known — so the burden of proof is high.

Can I be assessed the TFRP if I left the company before the taxes were due? ▼

Possibly — but it's a strong defense.

Key factors:

✓ When did you leave? (before or after payroll taxes were due?)
✓ Did you resign or were you terminated? (documented evidence?)
✓ Did you have any authority after you left?

✅ If you left before the taxes were due and had no authority afterward: Strong argument you're not responsible.

What if the business had no money to pay anyone? ▼

This can defeat "willfulness" — but you need to prove zero funds were available.

Defense:

✓ Bank statements showing $0 balance (or negative)
✓ No payments made to anyone (vendors, rent, loans)
✓ Business was insolvent

⚠️ However: If the business paid anyone (even $1) after payroll taxes were due, the IRS will argue it was willful (you chose to pay them instead of the IRS).

Can I negotiate a payment plan for the TFRP? ▼

Yes. The TFRP is eligible for:

✓ Installment Agreement (monthly payment plan)
✓ Offer in Compromise (settle for less)
✓ Currently Not Collectible (suspend collections)

→ Learn more about Payment Plans
→ Learn more about Offer in Compromise

How long does the IRS have to assess the TFRP? ▼

The IRS has 3 years from the date the payroll tax return (Form 941) was filed to assess the TFRP.