What is the Trust Fund Recovery Penalty (TFRP)?
The Trust Fund Recovery Penalty (TFRP) is based on Internal Revenue Code 6672, a statute that addresses the failure to collect and pay employment tax or the attempt to evade the tax and facilitates the collection of unpaid LLC payroll taxes. The TFRP serves as an alternative means of collecting unpaid payroll trust fund taxes when taxes are not fully collectible from the LLC that failed to pay the withheld taxes. The IRS uses this rule to bypass the company and collect the money straight out of personal pockets. The TFRP serves three purposes:
- It encourages prompt payment of income and employment taxes withheld from employees and other collected taxes;
- It makes the responsible person liable for 100% of the unpaid trust fund taxes; and
- It facilitates collection of trust fund taxes from secondary sources.
Who Counts as a Responsible Person Under IRC Section 6672?
A responsible person is anyone required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities. In an LLC, this can include LLC members, managers, officers, directors, or anyone who has check-signing authority and the power to decide which creditors get paid first. The TFRP may be imposed for:
- Willful failure to collect tax,
- Willful failure to account for and pay tax, or
- Willful attempt in any manner to evade or defeat tax or the payment thereof.
Responsibility is a function of duty, status, and authority therefore the IRS can and will seize personal assets for failing to pay payroll taxes.
What Happens if You Receive IRS Letter 1153?
Letter 1153 explains that the IRS’s efforts to collect the federal employment taxes due from the LLC named on the letter have not resulted in full payment of the liability. Therefore, the IRS proposes to assess a penalty against responsible person. The responsible person has 60 days to respond to Letter 1153 and can take the following actions in response to the letter:
- Agree to the assessment. If the responsible person agrees with this penalty for each tax period shown, they are asked to sign Part 1 of the Form 2751 which is enclosed with Letter 1153 and return it to the office that sent the letter. The IRS will then prepare and send Letter 1155, Notice of Agreed Trust Fund Recovery Penalty, and deliver the letter to the responsible person no later than 14 calendar days after receipt of signed Form 2751. The Trust Fund Recovery Penalty is then moved to the responsible person’s personal account. At this point, the responsible person can negotiate a payment plan, offer in compromise, or request the penalty be moved to currently not collectible status.
- Because responsible persons could change their minds after signing Form 2751 (and therefore request Appeals review before the deadline listed in Letter 1153), the IRS does not treat a case as agreed until the 60 day deadline expires. A responsible person’s signature on the Form 2751 does not extinguish their appeal rights.
- Appeal the proposed assessment. If the responsible person does not agree, they can submit a request for appeal to the office that sent the letter. Letter 1153 contains information and lists IRS publications on how to file an appeal/protest. The responsible person should file their protest within 60 days from the date of Letter 1153 to appeal this decision with the Independent Office of Appeals.
- Provide no response. This is also called an Unagreed Case. If the responsible person does not respond to the letter in 60 days, collections activities will proceed including filing a Notice of Federal Tax Lien and seizing personal assets.
When Does the IRS Seize Personal Property for Unpaid Payroll Taxes?
Forming an LLC or corporation protects personal assets from ordinary commercial debts, but that liability shield ends when business payroll taxes go unpaid. When a business fails to remit payroll taxes, the agency uses the Trust Fund Recovery Penalty to bypass the entity shield and convert the business debt into a personal tax liability.
How the IRS Reaches Personal Assets
- Personal Assessment (IRC § 6672): A Revenue Officer assesses the unpaid trust fund taxes directly against individuals who had check-signing authority or financial control (responsible person) and chose to pay other operating expenses ahead of the IRS). Once assessed, the debt attaches to your personal Social Security Number.
- Liquid Assets Come First: Before seizing physical property, the IRS initiates administrative levies including freezing personal checking and savings accounts, garnishing wages, or intercepting accounts receivable.
- Physical Property Seizure (IRC § 6331): If liquid levies fail to cover the liability and no payment resolution is established, a Revenue Officer can seize titled personal assets, including vehicles, secondary real estate, and business equipment.
- Primary Residence Protections: Under IRC § 6334(e), the IRS cannot seize a personal primary residence without first petitioning a U.S. District Court judge and demonstrating that all other collection remedies have been exhausted.
Ready to Get Help With The IRS?
If you received IRS Letter 1153 or are trying to figure out how to handle Form 2751, do not treat it as a routine business tax issue. The IRS is actively trying to pierce your LLC protection and hold you personally liable for unpaid LLC payroll taxes.
I will review your payroll records, evaluate your personal financial exposure, and protect your individual assets before the statutory 60-day deadline locks you into a permanent assessment.
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