Failing to turn over employee withholding taxes to the IRS can lead to the Trust Fund Recovery Penalty (TFRP), one of the IRS’s most severe penalties and is equal to 100% of unpaid income tax withheld and the employee portion of unpaid FICA taxes withheld plus interest until paid. This can result in tax liens, property seizure, and personal liability. If you receive a TFRP notice, contact a tax attorney immediately.

Trust Fund Recovery Penalty

Employers must withhold Medicare, Social Security (FICA), and income taxes from employees’ paychecks and hold them “in trust” until paid to the IRS. Willfully failing to do so triggers the TFRP, and the IRS can seize personal assets to recover the debt.

Who is Liable?

The TFRP applies to those responsible for collecting and paying payroll taxes, such as business owners, corporate officers, or others with authority over finances. Willfulness is defined as knowing about the taxes and failing to pay them.

IRS Action

Once the IRS determines liability, they may request financial documents and interviews. You have 60 days to appeal the TFRP assessment before the IRS issues a tax lien or levy.

Penalty Amount

The TFRP is equal to the unpaid taxes, effectively doubling your debt. Prompt payment or negotiating a settlement with a tax attorney is crucial.

California Version of TFRP

California’s Employment Development Department (EDD) imposes similar penalties for unpaid payroll taxes, holding individuals personally liable for 100% of the owed amount. Failure to pay can result in liens.

Next Steps

If you receive a TFRP notice, act quickly and explore your options and avoid severe financial consequences.