Business Payroll Tax Problems: How to Defend Against Trust Fund Recovery Penalties

Rona Law Firm
Aug 19, 2025
2 min read

When you own a business, handling payroll taxes is one of the most important responsibilities. Unfortunately, many business owners fall behind due to cash flow problems, bookkeeping errors, or relying on employees or outside payroll services who fail to submit taxes on time.

If the IRS believes that payroll taxes were not paid, they can pursue the Trust Fund Recovery Penalty (TFRP)—one of the harshest penalties in the tax code. The IRS doesn’t just go after the business. They can hold individuals personally liable for the unpaid taxes.

What is the Trust Fund Recovery Penalty (TFRP)?

The TFRP is a penalty the IRS uses to collect unpaid payroll taxes from business owners, officers, managers, or anyone responsible for collecting, accounting for, or paying those taxes.

If assessed, it allows the IRS to:

Seize personal assets (bank accounts, vehicles, property)
Garnish wages
Hold you personally liable for the full amount of unpaid payroll taxes, plus interest and penalties

Even if the business closes, the IRS can pursue responsible individuals for years.

Who Can Be Held Responsible for business payroll tax problems?

The IRS looks at anyone with:

Authority over finances (signing checks, making payments, deciding which bills to pay)
Decision-making power regarding payroll
Knowledge that payroll taxes were not being paid

This means it’s not always just the business owner—CFOs, bookkeepers, or other employees could also be targeted.

How the IRS Builds a Case

When a business falls behind, the IRS often assigns a Revenue Officer to investigate. They conduct interviews, review bank records, and identify “responsible persons.”

The Revenue Officer will typically ask you to complete Form 4180 (Report of Interview with Individual Relative to Trust Fund Recovery Penalty). What you say in this interview can determine whether the IRS holds you personally liable.

How a Tax Attorney Can Help

If you’re facing payroll tax problems, it’s critical to get legal help as soon as possible. An experienced payroll tax attorney can:

Defend you in Form 4180 interviews and protect your rights
Argue that you were not a “responsible person”
Demonstrate that you did not act “willfully” in failing to pay payroll taxes
Negotiate settlements such as Offer in Compromise or Installment Agreements
Prevent or release liens, levies, or wage garnishments against your personal assets

Protect Yourself and Your Business

The Trust Fund Recovery Penalty is not just a business problem—it can follow you personally. The sooner you act, the better your chances of defending yourself and limiting liability.

If your business is under IRS investigation for payroll tax issues, or if you’ve been contacted about a Trust Fund Recovery Penalty, it’s time to get professional legal help.