Defending Against and Abating the Trust Fund Recovery Penalty

The IRS aggressively enforces payroll tax compliance. When an employer withholds income and employment taxes from employees but fails to remit them, the Service may pursue collection not only from the business but also from individuals deemed “responsible persons.” This enforcement tool is known as the Trust Fund Recovery Penalty (TFRP) under 26 U.S.C. § 6672.

The TFRP can impose personal liability on officers, directors, shareholders, bookkeepers, and other individuals with authority over company finances. For practitioners, understanding the standards of responsibility, willfulness, and available defenses is critical to preventing or abating the penalty. A mishandled TFRP case can leave individuals personally liable for hundreds of thousands of dollars, while a well-prepared defense may eliminate or significantly reduce exposure.

Statutory Framework

• § 6672(a) – Imposes liability on any person who is responsible for collecting, accounting for, or paying over trust fund taxes and who willfully fails to do so.

• § 6671(b) – Defines “person” to include officers, employees, or members of a corporation, partnership, or association who have a duty to perform.

• § 6672(d) – Provides for contribution and indemnity among multiple responsible persons.

The IRS generally limits the penalty to the amount of trust fund taxes withheld from employees but not remitted.

Elements of Liability

To impose the TFRP, the IRS must establish:

1. Responsibility – The individual had significant control over the company’s finances, including authority to make decisions regarding bill payments and disbursements.

   • Courts consider factors such as check-signing authority, control over payroll, ability to hire/fire employees, and involvement in day-to-day financial operations (Barnett v. IRS, 988 F.2d 1449 (5th Cir. 1993)).

2. Willfulness – The failure to remit taxes was voluntary, conscious, and intentional, as opposed to accidental.

   • Paying other creditors with knowledge of unpaid trust fund taxes typically constitutes willfulness (Phillips v. United States, 73 F.3d 939 (9th Cir. 1996)).

IRS Assessment Procedures

• IRS initiates investigation and interviews potential responsible persons (Form 4180).

• If liability is determined, IRS issues Letter 1153 proposing assessment of the TFRP.

• Taxpayer has 60 days (75 if outside the U.S.) to appeal before assessment becomes final.

Defenses and Abatement Strategies

• Lack of Responsibility
  Demonstrate that the taxpayer lacked authority to make financial decisions. Titles alone are insufficient: control, not position, is the key factor.

• No Willfulness
  Show that failure was due to reasonable cause, lack of knowledge, or reliance on others. Payments made under duress or without knowledge of unpaid taxes can rebut willfulness.

• Procedural Defenses
  Argue improper assessment if IRS fails to follow statutory procedures (e.g., not issuing Letter 1153).

• Equitable Defenses
  Demonstrate reliance on professional advisors or establish that another responsible person was primarily liable.

• Penalty Abatement
  Request abatement based on reasonable cause. Though § 6672 does not explicitly provide a reasonable cause exception, courts and the IRS recognize equitable abatement in limited circumstances. Supporting evidence may include illness, natural disasters, fraud by employees, or reliance on erroneous IRS guidance.

Best Practices for Practitioners

• Attend the Form 4180 Interview
  Guide clients through the interview, ensure accuracy, and prevent admissions that may later be used to establish willfulness.

• Document Decision-Making Authority
  Corporate bylaws, organizational charts, and banking resolutions can demonstrate limited authority.

• Maintain Payment Records
  Showing attempts to pay the IRS first (before other creditors) supports a good-faith defense.

• File a Timely Protest
  Appeals can prevent assessment and create negotiation leverage.

• Consider Contribution Claims
  If multiple responsible persons are assessed, contribution rights under § 6672(d) may reduce net exposure.

Common Pitfalls

• Ignoring Letter 1153 and missing the appeal deadline.

• Assuming titles (e.g., CFO, Treasurer) automatically impose liability without examining actual authority.

• Allowing clients to make damaging statements during IRS interviews without counsel.

• Failing to document mitigating circumstances that support abatement.

Trust Fund Recovery Penalty Defense Checklist

Upon Receiving IRS Inquiry

• Determine client’s actual authority over finances.

• Collect corporate documents (bylaws, resolutions, banking records).

• Prepare client for Form 4180 interview.

Upon Receiving Letter 1153

• File written protest within 60 days.

• Argue lack of responsibility or willfulness.

• Present mitigating circumstances (illness, fraud, reliance on advisors).

Post-Assessment

• Evaluate potential abatement or refund claim.

• Assert contribution claims against other responsible persons (§ 6672(d)).

• Consider litigation in District Court or Court of Federal Claims if IRS refuses abatement.

Bottom Line

The Trust Fund Recovery Penalty represents one of the IRS’s harshest enforcement tools, converting business payroll tax debts into personal liabilities. Practitioners who intervene early by managing interviews, filing protests, and documenting defenses can often prevent assessment or secure abatement. Even after assessment, careful presentation of reasonable cause arguments and contribution claims may reduce the penalty.

A proactive, well-documented defense remains the taxpayer’s strongest safeguard against personal liability under § 6672. That’s where our years of experience come in.