A business’s unpaid payroll taxes can become a personal liability for someone responsible for collecting or paying trust-fund taxes who willfully fails to do so. The IRS calls this the Trust Fund Recovery Penalty, or TFRP. Ownership is not the only test, and operating through a corporation or limited liability company does not settle the question.
The practical inquiry is who had financial authority, what that person knew about the unpaid taxes, and what happened while funds were available. Review those questions by tax period. A person’s authority may have changed during the business’s history.
Separate trust-fund taxes from the total payroll bill
Employees’ withheld federal income tax and their share of Social Security and Medicare taxes are held for payment to the government. Under the IRS TFRP guidance, the payroll-related penalty is based on the unpaid trust-fund portion. It is not simply every tax, penalty, and interest charge appearing on the employer’s account.
Reconcile the relevant employment-tax returns, deposits, payments, and proposed penalty calculation. The employer’s full balance and a proposed individual’s TFRP assessment are related but distinct accounts. The business does not have to close before the IRS considers a personal assessment.
Responsibility turns on actual financial authority
The IRS looks at the duty to handle trust-fund taxes and the power to direct their collection, accounting, and payment. Potentially responsible people include officers, employees, partners, directors, shareholders, and others controlling disbursements. Payroll service providers and people within them can also be involved.
A job title or ability to sign a check is evidence to examine, not a complete analysis. Who chose which creditors were paid? Who could authorize payroll, access funds, or correct missed deposits? Who was able to obtain and act on tax information?
The IRS expressly distinguishes an employee whose sole function was paying bills as directed by a superior from someone exercising independent judgment over financial affairs. Document what actually happened rather than assuming either that all bookkeepers are liable or that only the owner can be liable.
Willfulness does not require an intent to steal
The IRS describes willfulness in terms of awareness, or circumstances in which the person should have been aware, combined with intentional disregard or plain indifference to the requirements. It does not require an evil motive. Paying other creditors with available funds when employment taxes cannot be paid can indicate willfulness.
For example, a decision to pay a supplier after learning payroll deposits were missing presents different questions from a clerical employee processing payments without discretion or knowledge. This is an illustration of the factual issues, not a prediction of liability in either situation.
Do not treat withheld taxes as working capital while waiting for revenue to recover. If current deposits are being missed, obtain advice about immediate compliance as well as past periods. A proposed payment arrangement for old debt does not replace current payroll obligations.
Build a period-by-period evidence file
- Employment-tax returns, payroll registers, deposit confirmations, and IRS account records for each affected quarter.
- Bank statements, signature authority, payment approvals, and records showing who controlled disbursements.
- Employment agreements, officer responsibilities, organizational records, and changes in management.
- Messages and notices showing when each person learned of missed deposits or unpaid balances.
- Payroll-provider contracts, reports, and correspondence, along with evidence of payments actually reaching the agency.
Preserve complete records, including material that may complicate your position. If multiple people or the business itself need advice, ask whether separate representation is necessary because their interests may differ.
Take an interview or proposed assessment seriously
The IRS may request an interview to investigate responsibility. Before responding, review the relevant periods and source documents. Do not guess about dates or someone else’s authority. IRS Notice 784 explains potential personal liability and the implications of outsourcing payroll duties.
If the IRS proposes a TFRP assessment, the letter explains the protest and appeal rights. Calendar the deadline using that letter and its applicable rules, including any special rule for a letter addressed outside the United States. Do not sign an agreement to the assessment without understanding its effect. After assessment, personal assets can become subject to collection procedures.
The firm’s Dayton tax representation page and attorney profile provide context for discussing a potential engagement. Explain whether the request concerns an interview, proposed penalty, or already-assessed debt.
Ohio withholding is a separate liability question
Ohio Revised Code 5747.07(G) provides a separate personal-liability rule for specified people responsible for withholding reports or payment. It also addresses continuing liability after an entity’s dissolution, termination, or bankruptcy. Do not assume the federal TFRP test or an IRS resolution determines Ohio liability. The agency comparison explains why the accounts require separate attention.
This is general information, not legal advice, and does not create an attorney-client relationship.