IRS Letter 1153: Proposed Trust Fund Recovery Penalty

Letter 1153 is the IRS telling an individual that it proposes to assess a trust fund recovery penalty (TFRP) against them personally because a business did not pay over withheld payroll or excise taxes. The IRS lists it as Proposed Trust Fund Recovery Penalty. If you own, run or manage a business with employees, this is among the most serious letters you can receive, because it moves the problem from the company to you. It also comes with a firm appeal window.

What the penalty is

Trust fund taxes are the income taxes and the employee share of Social Security and Medicare taxes that a business withholds from employee pay, plus certain collected excise taxes. The business holds that money in trust for the government until it makes the federal tax deposit. The TFRP can apply when those taxes are not paid and cannot be collected from the business. The business does not have to have closed.

The penalty equals the unpaid trust fund balance: the unpaid withheld income taxes plus the employee's share of withheld Social Security and Medicare taxes, or, for excise taxes, the unpaid collected amount.

Who can be a "responsible person"

The IRS needs two things: that you were responsible for collecting or paying the taxes, and that you willfully failed to do so.

• Responsibility means you had the duty and power to direct the collecting, accounting and paying of the trust fund taxes. The IRS lists corporate officers and employees, partners, directors and shareholders, nonprofit trustees, and responsible parties at payroll service providers and professional employer organizations. An employee who only paid bills as a superior directed is not a responsible person, but what matters is whether you exercised independent judgment over financial affairs.
• Willfulness means you knew, or should have known, of the unpaid taxes and either intentionally disregarded the law or were plainly indifferent to it. The IRS says no evil intent or bad motive is required. Paying other creditors when the business cannot pay employment taxes is an indicator of willfulness.

The IRS may ask a person to complete an interview to determine the scope of their duties.

Your options

1. Agree. If you agree, sign Form 2751, as the IRS appeals list describes, and return it.
2. Disagree and appeal. Send a protest to the sending office within 60 days (75 outside the United States). Publication 5 explains how to prepare it, including when a formal written protest is required. Include the facts that show you were not a responsible person or did not act willfully, and attach evidence such as bank signature records, organizational documents, or job descriptions.
3. Address the business debt. Resolving the underlying trust fund tax debt can reduce or end your exposure. Discuss the mechanics with a professional before paying anything.
4. Ask for more time. Do so in writing before the date passes.

What happens if you do not respond

The IRS assesses the TFRP and sends a Notice and Demand for Payment. After assessment, it can take action against personal assets, including a federal tax lien, levy or seizure.

Interest and penalties

Interest accrues on the assessed penalty. See trust fund recovery penalty, employment tax penalties overview and payroll tax penalties and relief.

Common mistakes

• Assuming a corporation or LLC shields you from this penalty. It does not, if you meet the responsible-person test.
• Treating the letter as something the company's accountant will deal with. The letter is addressed to you.
• Giving casual interview answers without understanding their consequences.

To prevent a repeat, make deposits on schedule and, if you outsource payroll, verify them in your own tax account. See federal payroll tax deposits.

When to involve a CPA

Treat this as urgent. A CPA can assemble the evidence on responsibility and willfulness and prepare the protest. If the matter involves complex legal arguments, we will advise you to consult a tax attorney. With a signed Form 2848, we can communicate with the IRS for you. See IRS appeals.

How we can help

We can review Letter 1153, test the facts against the responsibility and willfulness tests, and prepare the protest. See our IRS representation services or contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.