Trust Fund Recovery Penalty Help in Exeter, NH | Payroll Tax

The short version

The Trust Fund Recovery Penalty lets the Internal Revenue Service collect unpaid payroll tax from individuals instead of the business. If the IRS decides you were responsible for making the deposits and you paid other bills first, it can assess the withheld portion against you personally. Incorporating does not protect you, and bankruptcy generally does not clear it.

Cash got tight. Payroll had to run, rent had to be paid, and a supplier was threatening to stop delivering. So the employment tax deposit waited a week, and then another one, and nobody from the Internal Revenue Service said a word about it.

That silence is the dangerous part. Miss your deposits and the IRS will not be at your door next week. It can be months before anyone shows up, and by then the penalties and interest have grown into a number the business has no chance of paying. That is how plenty of otherwise healthy companies have gone under. Then, once the IRS decides the business cannot pay, it goes looking for somebody who can.

That is what this penalty is. It shifts the withheld portion of the debt off the company and onto the people the IRS decides were responsible for it. Getting in front of that early is most of the work, and it is the part that is still possible to influence.

Why this tax is treated differently

Not all taxes are equal. Most tax debt is money you owe. Trust fund tax is money you were holding for somebody else.

When you run payroll you withhold income tax from your employees, plus their half of Social Security and Medicare. That money is theirs. You hold it in trust until you deposit it with the IRS. Spend it on rent instead and you have spent your employees' money, and the government will treat it that way.

Who the IRS calls a responsible person

Two things have to be true. You were a responsible person, meaning you had the authority to decide which bills got paid. And you acted willfully, which here does not mean you set out to cheat anybody. It means you knew the payroll taxes were owed and you paid something else first.

Your job title has almost nothing to do with it. If you are the controller, you are very likely the person the IRS considers responsible for filing the employment tax returns and making the deposits. Bookkeepers, office managers and anyone with signature authority have all been assessed, including people who had the authority and never once used it.

It can also land on more than one of you at once. If you and your spouse are partners in the business, the IRS can assess both of you for the same tax and charge each of you interest on it. The same liability, sitting on two people. That surprises people every time.

The Form 4180 interview

Before it assesses, the IRS interviews the people it is considering. That interview is on Form 4180 and it exists for one purpose: to establish who was responsible and whether they acted willfully. Who signed the checks. Who decided which creditors got paid. Who knew the deposits were behind, and when.

People walk into that interview trying to be helpful and talk themselves into an assessment. Every answer goes in the file.

If the IRS has scheduled a Form 4180 interview with you, call me before it happens. Afterwards is much harder.

What I do about it

Establish where the liability actually sits. Not every officer is a responsible person and not every missed deposit is willful. Sometimes the honest answer is that somebody else controlled the money.
Get the returns filed. Missing Forms 941 and 940 have to be brought current before anything else can be resolved.
Represent you in the interview. You sign a Form 2848 and the Revenue Officer works through me.
Challenge the assessment where there are grounds. There are appeal rights and they have deadlines, which is one more reason not to sit on the letters.
Deal with what is genuinely owed. Installment agreement, hardship status, or an offer if the numbers actually support one. See IRS tax resolution for how those work.

If you use a payroll service, check the deposits

If your payroll company takes money out of your account for employment tax and then does not pay it, the IRS holds you responsible anyway. Payroll companies have vanished overnight and left their clients paying the same tax a second time. You can confirm the deposits are landing, and you should.

I will tell you where you stand. If you controlled the money and the deposits did not get made, I am not going to pretend there is a clever argument that makes that disappear. What I can do is make sure the assessment is limited to what the law actually supports, that the penalties get looked at properly, and that whatever is genuinely owed gets resolved on terms you can survive.

Common questions

What exactly is the trust fund portion of payroll tax?

It is the money you withheld from your employees. Their income tax withholding and their half of Social Security and Medicare. You never owned it. You held it for them and you were supposed to hand it to the government, which is why not depositing it is treated far more seriously than an ordinary unpaid bill.

Can the IRS really come after me personally for a company debt?

Yes. That is the entire point of the Trust Fund Recovery Penalty. It moves the trust fund portion of the debt off the business and onto the individuals the IRS decides were responsible for paying it and chose not to. Incorporating does not stop it.

I am the controller, not the owner. Am I at risk?

You can be. The test is not your job title, it is whether you had authority to decide which bills got paid. Controllers, bookkeepers, office managers and check signers have all been assessed, and so have people who had signature authority and never used it.

My spouse and I are both partners. Can the IRS assess us both?

It can, and it does. The same tax can be assessed against more than one responsible person, and each of you is charged interest on it. The IRS will not collect the same money twice in the end, but until it is resolved you are each carrying the full amount.

The IRS wants to interview me. Should I do it alone?

No. That interview is on Form 4180 and its only purpose is to establish whether you were responsible and whether you acted willfully. Every answer becomes part of the file. This is the single strongest reason to have representation in place before you say anything.

My payroll company took the money and never paid it. Am I still liable?

Usually yes, which is the cruelest part of this. If a payroll service debits your account for employment tax and fails to deposit it, the IRS still holds you responsible. Payroll companies have disappeared overnight and left owners paying the same tax twice.