Employment and Payroll Tax Issues
When the IRS Holds You Personally Liable for Payroll Taxes
As a business owner, you collect federal income, Social Security, and Medicare taxes from every employee’s paycheck. That money is not yours—it is held in trust for the government. Failing to withhold, report, or deposit it properly does not just create a business debt. It can pierce the corporate veil and make you personally liable for the full amount, plus penalties and interest.
At Alan Goldstein & Associates, we help business owners resolve employment tax problems before they escalate into personal liability, and we defend responsible parties facing the Trust Fund Recovery Penalty.
The Issue: How Payroll Tax Problems Escalate
The Trust Fund Recovery Penalty (TFRP)
Under Internal Revenue Code § 6672, the IRS can assess a penalty equal to 100% of the unpaid trust fund taxes against any “responsible person” who willfully failed to collect, account for, or pay over those taxes . This is not a business debt—it is a personal penalty that can be collected from your individual assets.
The TFRP applies to:
- Federal income taxes withheld from employee wages
- The employee’s portion of Social Security and Medicare taxes (FICA) withheld from wages
The penalty does not include the employer’s matching portion of Social Security and Medicare, or federal unemployment taxes—but those obligations still carry their own penalties .
Who Is a “Responsible Person”?
The IRS defines a responsible person as anyone with the duty and power to direct the collecting, accounting, and paying of trust fund taxes . This is broader than just the owner or CEO. It can include:
- Corporate officers and directors
- Partners and partnership employees
- Shareholders with financial authority
- Non-owner employees with significant control over company finances—such as a controller who decides which creditors get paid
- Payroll service providers and their responsible parties
A non-owner employee is generally not responsible if their only function is paying bills as directed by a superior. But if they exercise independent judgment over which creditors to pay, they can be held liable .
What “Willful” Means
Willfulness does not require bad intent. You act willfully if you were aware—or should have been aware—that the taxes were unpaid, and you either intentionally disregarded the law or were plainly indifferent to its requirements . The classic example: using available funds to pay other creditors while payroll taxes go unpaid. That is willfulness, even if you were trying to keep the business afloat .
The Deposit Penalty (Failure to Deposit)
Separately from the TFRP, the IRS assesses a failure-to-deposit penalty for late, incorrect, or improperly made federal tax deposits. The penalty rate depends on how late the deposit is:
| Days Late | Penalty Rate |
|---|---|
| 1–5 days | 2% of the unpaid deposit |
| 6–15 days | 5% |
| 15+ days | 10% |
| After first IRS notice (10+ days) | 15% |
The penalty does not stack—the highest applicable rate applies, not the sum of prior rates .
Other Employment Tax Penalties
Late filing of employment tax returns (Form 941) carries a failure-to-file penalty of 5% per month of the unpaid tax, up to 25%. Late payment adds a failure-to-pay penalty of 0.5% per month . These are on top of the TFRP and deposit penalties.
Why Choose Alan Goldstein & Associates?
- TFRP Defense: If the IRS has proposed the Trust Fund Recovery Penalty against you, you have 60 days from the date of the Letter 1153 to appeal. We prepare and file the protest, represent you before Appeals, and challenge both the “responsible person” and “willfulness” determinations .
- Responsibility Analysis: We examine whether you truly exercised the kind of control the IRS alleges. Not every officer or check-signer is a responsible person under the law.
- Willfulness Mitigation: We develop the factual record to show that your actions were not willful—or that another party bore true responsibility for the unpaid taxes.
- Business and Personal Resolution: We negotiate payment plans, Offers in Compromise, and Currently Not Collectible status for the underlying business liability while defending against personal assessment.
- Compliance Restoration: We bring your payroll filings and deposits current, establish compliant procedures, and prevent future exposure.
Take the First Step Toward Financial Freedom
The TFRP can follow you personally long after the business has closed. If you have unpaid payroll taxes—or have received a Letter 1153 proposing the penalty—the time to act is now.
Contact Alan Goldstein & Associates today for a confidential consultation. Let us help you protect your personal assets and resolve the payroll tax problem for good.