Trust Fund Recovery Penalty Defense for Businesses & Individuals

When payroll taxes go unpaid, the IRS doesn’t stop at your business; they can hold you personally responsible.

If you’re a business owner, corporate officer, payroll manager, bookkeeper, or even an individual who signed the checks, the IRS can hold you personally responsible for the full amount of unpaid trust fund taxes, plus steep penalties.

Get experienced legal defense from Anthony N. Verni, a licensed tax attorney, CPA, and MBA with 25+ years of experience, to protect your business and personal assets from IRS penalties.

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What Is the Trust Fund Recovery Penalty (TFRP)?

The IRS Trust Fund Recovery Penalty (TFRP) is a serious enforcement used when a business fails to deposit employment taxes withheld from employees’ paychecks.

These funds, including social security, medicare, and income tax taken out of paychecks, are called “trust fund” taxes because the business collects them from employees and keeps them safe for the government until it’s time to send them in.

When the IRS doesn’t receive these funds, they pursue not just the business, but individuals involved in collecting, accounting for, and paying over the taxes.

Who Is Liable for the TFRP?

The IRS doesn’t just pursue businesses for unpaid trust fund taxes; it holds people responsible.

Suppose payroll taxes were withheld from employees’ paychecks but not deposited with the IRS. In that case, the agency will look beyond the business entity to find who was personally responsible for handling those funds. This person is known as the “responsible party,” and they can be held liable under the Trust Fund Recovery Penalty (TFRP).

You May Be Liable If You Had Control

The IRS defines a “responsible person” not by job title but by control over financial decisions. You may be held personally liable if you:

Had the authority to sign or direct payments from business accounts
Controlled payroll operations or tax filings
Determined which creditors got paid when funds were limited
Knew taxes were due, but allowed other bills to be paid instead

This means owners, partners, CFOs, controllers, payroll managers, in-house bookkeepers, and even outside accountants may all be at risk, especially if their names appear on bank signature cards or tax filings.

Personal Liability Isn’t Always Obvious

Many individuals are surprised to learn the IRS is pursuing them personally for their company’s unpaid trust fund taxes. You might have:

Stepped into a temporary leadership role during a financial crisis
Helped run payroll without realizing deposits were missing
Resigned or sold your shares but didn’t formalize the exit properly

Even if you weren’t the final decision-maker, the IRS may still try to assign liability if you were involved in the process. They often assess multiple individuals in the same case, leaving it up to each one to prove they weren’t responsible.

Don’t Assume You’re Safe; Get Legal Clarity

If you’ve received Letter 1153, been asked to attend a Form 4180 interview, or simply worked in a financial role at a business with payroll tax issues, you need to act fast. Once assessed, the penalty becomes your personal debt independent of the business’s fate.

We help individuals and business leaders understand where they stand, challenge improper liability, and build a defense before the IRS locks in their decision.

How Is the Penalty Calculated?

The Trust Fund Recovery Penalty is calculated at 100% of the unpaid trust fund taxes that’s the portion of payroll taxes withheld from employees’ wages but never deposited with the IRS.

This includes:

Federal income tax withheld
The employee share of Social Security and Medicare

It does not include the employer’s matching portion.

To determine the exact penalty, the IRS uses a dedicated system known as the Automated Trust Fund Recovery (ATFR) tool. This system is used by IRS revenue officers to:

Calculate the penalty amount
Document the investigation findings
Prepare the official assessment for managerial review and approval

Once the TFRP is assessed, the amount becomes a personal civil liability, no different from owing back taxes directly.

The Foreign Earned Income Exclusion Form 2555 – A Case Study *

Tim is a senior level construction engineer who is being actively recruited by a number of overseas search firms who specialize in the placement of U.S. senior level professionals in the Middle East. Overseas Job Placements Limited, whose principal place of business is Qatar, contacts Tim about a job opening with a construction firm in Qatar for an Executive Vice President of Development. The annual compensation package includes a base salary of $500,000, together with a performance bonus. Additionally, the package includes a housing allowance, use of a company car, paid vacation as well as sick days and other perks.

The homepage of the recruiter’s website contains following tag line: “Work in Qatar without paying any income taxes.” In addition, the recruiter repeatedly tells Tim: “This income is tax free.”

Tim also speaks with his tax return preparer who tells him that he does not have to worry about filing U.S. tax returns since the earned income exclusion eliminates all taxable income for U.S. tax purposes. The return preparer makes this representation based solely upon his general awareness that the foreign earned income exclusion exists.

Tim accepts the position with Construction in Qatar Limited in late June of 2008. On July 1, 2008Tim relocates to Qatar together with his family, and begins working. While in Qatar,Tim opens several Foreign Financial Accounts, including savings, checking and brokerage accounts. Tim receives his bi-weekly salary, bonuses and employer reimbursements by direct deposit into his checking account. After paying his monthly expenses, Tim transfers the excess of his compensation from his checking account to either the savings or brokerage account.Tim works in Qatar from July 1, 2008 to December 31, 2014. At the conclusion of the project Tim and his family travel for five months prior to returning to the United States. On December 31, 2014 Tim’s foreign financial account balances were as follows: (i) checking account $39,000; (ii) savings account $618,000; and (iii) brokerage account $317,282.

While working in Qatar, Tim’s tax return preparer files a Federal tax return for 2008, reporting Tim’s U.S. earnings from Perini Construction for the period January 1, 2008 to June 28, 2008. However, the tax return preparer does not report Tim’s foreign earned income from Qatar for the period July 1, 2008 thru December 31, 2008, nor does he report any of the income Tim received from his foreign financial accounts, including his checking, savings and brokerage accounts. Finally, Tim’s tax return preparer checks the “no” box in response to questions 7a and 7b, contained in Part III of Schedule B. Tim signs the return under penalty of perjury and files the tax return prior to the due date.

For 2008, Tim also fails to file TDF-90-22.1, since the tax return preparer was not aware of the Bank Secrecy Act and the reporting requirements. As a result, the tax return preparer never made an inquiry whether Tim had an interest in or signatory authority over a foreign financial account at any time during 2008.

On the advice of the recruiter and representations from his tax return preparer, Tim concludes that all of his income is excluded and that he is not required to file a federal income tax return. Tim is also unaware of either the Bank Secrecy Act or the Foreign Asset Tax Compliance Act and the reporting requirements. Consequently, Tim fails to file a U.S. Federal Income Tax Return as well as FinCen Form 114 (formerly known as TDF-90-22.1) for the tax years2009-2014. Tim also fails to file Form 8938 for the years 2011-2014.

While traveling overseas with his family, Tim meets a U.S. immigration attorney named Jeremy at an expat bar in Bangkok. After swapping stories, Tim states: “Working overseas is great. You never have to pay any income taxes.” Jeremy responds: “What are you talking about? Don’t you know that you are subject to income tax on your worldwide income?” Tim then states: “You must be mistaken. My tax return preparer told me that all of my foreign earned income is excluded under the foreign earned income exclusion. He also told me that I do not need to file U.S. Income Tax Returns” Jeremy, who is in disbelief at what he is hearing, tells Tim: “The foreign earned income is subject to a ceiling that is annually indexed for inflation. Any amounts over the ceiling are subject to income tax in the U.S. In addition, you have to report any income that you receive from a foreign financial account and may have other financial reporting responsibility.” Tim then asks Jeremy if he knows a good tax attorney in the states. Jeremy provides the contact information for one of his colleagues, who are a tax attorney.

These tragic results could have been avoided, had Tim consulted with a tax attorney, prior to accepting the position or, at the very least, while he was working overseas.

Upon his return to the states in June of 2015, Tim contacts the tax attorney, who reviews Tim’s tax situation and advises him of the following:

U.S. taxpayers are taxed on their worldwide income, and accordingly, must file Federal Income Tax Returns if they meet the minimum filing threshold;
The amount that may be excluded under the foreign earned income exclusion is subject to a ceiling that is annually indexed for inflation;
Tim’s foreign earned income for each of the tax years 2008-2014 substantially exceeds the foreign earned income exclusion for each of the preceding six years;
Any income in excess of the foreign earned income exclusion is subject to U.S. income tax;
The maximum amount of earned income that may be excluded for each year is ($87,600 for 2008, $91,400 for 2009, $91,500 for 2010, $92,900 for 2011, $95,100 for 2012, $97,600 for 2013, $99,200 for 2014 and $100,800 for 2015);
S. taxpayers must also report any income received from a Foreign Financial Account on Schedule B and must also report the sale of securities, and any gain or loss on Schedule D;
In addition, a U.S. taxpayer must file FinCen Form 114 and report any interest in or signatory authority over any Foreign Financial Account, where the aggregate balance at any time during the tax year exceeds $10,000;
A U.S. taxpayer must also make a disclosure on Schedule B, Part III, questions 7a and 7b concerning whether the taxpayer had an interest in or signatory authority over a foreign financial account at any time during the tax year;
Depending upon the foreign financial account balances, Tim is required to file Form 8938 for the tax year 2014 and may be required to file Form 8938 for 2011-2013; and
Tim should immediately make an application for participation in the Offshore Voluntary Disclosure Program. The tax attorney further explains to Tim that ifhe is accepted into the Program, Tim will have to:
File Federal Form 1040X (Amended Federal Income Tax Return) for 2008 and Form 1040 for the years 2009-2014;
File FinCen Form 114 for the tax years 2008-2014;
Pay any income tax due for the six year period,together with a 20% accuracy related penalty and interest; and
Pay a miscellaneous offshore penalty equal to 27.50 of the highest aggregate balance for any one year during the preceding six years. After reviewing Tim’s bank and brokerage statements, the tax attorney concludes that the highest aggregate balance was in 2014 and that he estimates the miscellaneous offshore penalty will be $267,928.

Foreign Earned Income Exclusion-Qualifications and Limitations

The foreign earned income exclusion is based upon the concept that a U.S. Citizen or resident alien is subject to federal income tax on the individual’s worldwide income. This concept is consistent with the definition of “gross income, “contained in I.R.C. § 61.If a U.S. taxpayer lives overseas and meets certain qualifications, the taxpayer may be able to exclude foreign earned income up to an amount that is annually indexed for inflation. A taxpayer may also be entitled to the foreign housing exclusion or deduction.

The following U.S. taxpayers are eligible to claim the foreign earned income exclusion:

A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes the entire tax year;
A U.S. resident alien who is a citizen or national of a foreign country, with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire year; or
U.S. Citizen or U.S. resident alien who is physically present in a foreign country for at least 330 full days during any period of 12 consecutive months.

A U.S. taxpayer who falls into one of the three categories is eligible to claim the foreign earned income exclusion and the foreign housing exclusion or deduction, provided the individual’s tax home is a foreign country throughout the taxpayer’s period of bona fide residence or physical presence.

The term “tax home” is generally considered to be in the area of the taxpayer’s main place of business, employment or post of duty, regardless of where the taxpayer maintains the family home. The taxpayer’s tax home is where he or she regularly or permanently is engaged to work as an employee or self-employed individual.

In addition,a taxpayer’s tax home must be in a foreign country. A foreign country is considered to be any territory under the sovereign control of a government other than the United States. The term “foreign country,” does not include possessions of the United States.

According to the IRS, Only Earned Income Can Be Excluded

The term “foreign earned income” for purposes of computing the foreign earned income exclusion generally includes wages,salaries, professional fees and other compensation received for personal services performed by an individual in a foreign country for the period which the taxpayer meets the tax home test, and is either a bona fide resident or meets the physical presence test. Foreign earned income also includes self-employment income as well as non-cash income such as employer paid housing, or use of an automobile and allowances and reimbursements.

Foreign earned income does not include distributions of corporate earnings or profits in excess of a reasonable allowance for compensation for a taxpayer’s personal services, nor does it include pension and annuity income, or social security benefits. Furthermore, interest, ordinary dividends, capital gains and alimony as well as other income generally considered to be “passive” are also excluded from the definition of foreign earned income. An example of other passive income would be rental income received with from foreign real estate.

The foreign earned income exclusion is claimed on either Form 2555 or Form 2555EZ, depending upon the circumstances. The foreign earned income that can be excluded varies from year to year due to indexing for inflation. The maximum amount of income that a taxpayer may exclude for the tax year 2014 is $99,200. In addition to the foreign earned income exclusion an eligible taxpayer may be entitled to foreign housing exclusion, however, a taxpayer’s housing expenses may not exceed certain limits, which are determined by the location, where the housing expenses are incurred.

If you are planning to work overseas or are already working abroad, you need to be mindful of a number of things, including, whether you are subject to income tax in the country you will be or are already performing the services, and if so, whether foreign income taxes will or are being withheld and paid on your behalf.Additionally, if foreign income taxes are withheld, you will need to examine the foreign country’s effective tax rate to determine whether the foreign income taxes withheld will offset the U.S. tax liability on the non-excluded portion of your foreign earned income. If the effective tax rate for the foreign country is less than the U.S. effective rate, you may be subject to U.S. tax and need to consider making estimated tax payments.

Likewise, if you are performing services in a country where no income tax is imposed, and your foreign earned income substantially exceeds the annual exclusion, you need to make U.S. estimated tax payments to cover the U.S. tax on that portion of the foreign earned income, which exceeds the amount excluded on Form 2555. Failure to provision for the additional tax can result in stiff penalties as well as interest on the unpaid balance. Finally, depending upon the particular circumstances, you may also have other reporting responsibility, including but not limited to, FinCen Form 114 and Form 8938.

If you are self-employed you also need to be aware that your foreign earned income may be subject to self-employment tax, even if the foreign earned income exclusion results in no federal income tax due. Unless the foreign country in which you are performing the services is a party to a totalization agreement with the United States and the foreign equivalent of U.S. social security taxes have been withheld, you will be subject to self employment taxes on any self-employed income. The self-employment tax is independently computed without regard to taxable income.

CONCLUSION

Many of these issues can be avoided through proper tax planning with the assistance of a tax attorney, who will analyze your particular situation. Depending upon your anticipated income level, it maybe prudent to have a pro forma tax projection prepared that reflects: (i) the amount of foreign earned income; (ii) the amount of foreign earned income estimated to to be excluded; (iii) the foreign country’s effective tax rate, if any; (iv) the amount of foreign income tax, if any, to be withheld; and (v) whether the individual performing the services overseas is subject to self-employment tax. This exercise should aid a taxpayer in deciding whether working overseas makes financial sense.

Understand Your Exposure Before the IRS Makes It Final

The Trust Fund Recovery Penalty isn’t estimated; it’s calculated.

We’ll help you determine the full scope of your liability based on IRS methodology, timelines, and documentation standards before the IRS finalizes its assessment.

Request a private strategy session with our attorneys.

Risks & Consequences of the TFRP

When the IRS enforces the Trust Fund Recovery Penalty, the consequences can be severe for both the business and any individuals deemed responsible.

For Individuals

Personal Liability: You may be held personally responsible for 100% of the unpaid trust fund taxes.
Wage Garnishments: The IRS can garnish your paycheck or retirement income.
Bank Levies: Your personal bank accounts may be frozen or emptied.
Tax Liens in Your Name: Public liens may appear on your credit reports.
Asset Seizures: Real estate, vehicles, and investment accounts are all at risk.

For Businesses

Frozen Business Accounts: Levies can halt operations overnight.
Loss of Credit Access: Federal tax liens can damage business credit ratings.
Contract Disqualification: Government contracts may be denied due to unresolved payroll liabilities.
Operational Disruption: Revenue officers may appear on-site, demanding immediate compliance.
Forced Closure: In extreme cases, the IRS may seize assets or shut the business down.

Our Trust Fund Recovery Penalty Defense Services

Trust fund recovery cases demand more than routine tax help; they require legal precision, strategic planning, and a deep understanding of how the IRS assigns personal liability. Here are the services we provide:

IRS Interview Representation

We represent you during IRS interviews, especially the critical Form 4180 interview, where what you say can determine whether the IRS holds you personally liable.

Review of IRS Evidence

We audit the IRS case file, challenge inaccuracies, and flag procedural flaws that can be used to dispute or reduce the penalty.

Determining Responsibility

We break down your actual role within the business to demonstrate you are not a “responsible person” under IRS criteria, an essential defense.

Challenging Willfulness

We develop legal arguments and gather documentation to prove that any willful failure to pay taxes is due to a lack of control, knowledge, or decisions made under pressure.

Legal Briefs & Written Responses

From formal protests to appeals and legal letters, we prepare all necessary written responses with the clarity and authority the IRS takes seriously.

Administrative Appeals

We file official appeals and represent you during an IRS Appeals Office proceeding to challenge assessments before they become final.

Federal Court Litigation

If needed, we represent you in U.S. Tax Court or Federal District Court, with the full backing of our litigation experience.

Strategic Negotiation & Relief

Whether you need a payment plan, IRS penalty abatement, currently not collectible status, or an offer in compromise, we negotiate the solution that fits your financial position.

Asset Protection

We act swiftly to prevent or release levies, liens, and garnishments, preserving both your personal finances and business continuity.

Full IRS Correspondence Management

From start to finish, we manage all communication with the IRS, shielding you from missteps and keeping you fully informed throughout the process.

Why Choose Verni Tax Law?

Defending against the Trust Fund Recovery Penalty takes more than just tax knowledge; it requires a precise mix of legal strategy, forensic insight, and authority in front of the IRS. That’s where Verni Tax Law stands apart.

Dual credentials that matter in TFRP cases

Anthony N. Verni isn’t just a tax attorney; he’s also a CPA and holds an MBA. This unique combination means your case is approached from both a legal and financial lens, with every angle accounted for.

Focused experience in IRS penalty defense

With 25+ years of experience, we’ve represented clients facing complex TFRP assessments, including multi-party investigations, six-figure penalties, and high-risk audits. We understand how the IRS builds its case and how to dismantle it.

Personal involvement from start to finish

Verni Tax Law doesn’t pass your case down a chain of staff. Anthony personally reviews every file, engages directly with IRS agents, and leads your defense from day one.

Transparent fees and communication

From day one, you’ll know exactly what to expect—no hidden charges, no vague billing terms. We offer upfront clarity on scope, pricing, and progress updates throughout your case.

Resolution that protects the bigger picture

Whether you’re safeguarding your business, your personal assets, or both, we develop strategies that consider long-term risks, not just short-term relief.

Frequently Asked Questions

How long does the IRS have to assess the trust fund recovery penalty?

The IRS typically has three years from the date a payroll tax return is filed to assess the IRS Trust Fund Recovery Penalty. However, if no return was filed or fraud is suspected, this time limit may not apply.

Can the trust fund recovery penalty be appealed?

Yes. You can appeal the proposed penalty before it’s assessed. This is usually done after receiving IRS Letter 1153, which outlines your right to file a protest and request an Appeals hearing.

What is IRS Form 4180 and why is it important?

Form 4180 is used during interviews to gather facts about your role in the business. It helps the IRS determine whether you’re a “responsible person” and if your actions were “willful.” What you say on this form can directly impact your liability.

Can multiple people be held liable for the same penalty?

Yes. The IRS can assess the same TFRP amount against multiple individuals. Each person is jointly and severally liable, meaning the IRS can collect the full amount from any one of them.

What if I can’t afford to pay the trust fund recovery penalty?

Even if you’re found liable, the IRS may consider your financial situation. You could qualify for a payment plan, offer in compromise, or be placed in currently not collectible status, depending on your ability to pay.

How do I know if I am a “responsible person”?

The IRS considers several factors, like whether you had authority over finances, signed checks, made payroll decisions, or withheld taxes. You don’t have to be an owner, bookkeepers and managers can also be held liable.

What happens after the penalty is assessed?

Once assessed, the TFRP becomes a personal debt. The IRS can file a Notice of Federal Tax Lien, issue levies, and garnish wages or accounts until the balance is resolved.

Can the penalty be discharged in bankruptcy?

In most cases, the TFRP cannot be discharged in bankruptcy. It’s considered a priority tax debt, especially if it stems from trust fund taxes like withheld payroll taxes.

What are common defenses against the TFRP?

Common defenses include proving you’re not a responsible person, your actions were not willful, or the IRS has made procedural errors. Having proper representation can help surface and present strong defenses.

How can I avoid the trust fund recovery penalty in the future?

Stay current with payroll tax filings and deposits, review who handles your tax responsibilities, and maintain strong internal controls. If you’re unsure, consulting a tax attorney or CPA before issues arise can protect you.

Hear from relieved
Taxpayers who trusted Verni Tax Law

Anthony was creative in helping me resolve some past issues in a way that they never became a problem so that is greatly appreciated and I feel confident I can now enjoy my retirement with peace of mind. Thanks for that.

Ken B.

Cebu City, Philippines

Douglas R.

Osaka, Japan

Phil Y

President, Swift & Secure Systems Inc., Boynton Beach, FL

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