IRS Letter 1153: Trust Fund Recovery Penalty — Practitioner Defense Guide
Letter 1153 is one of the most serious IRS notices a business owner or officer can receive. It proposes to assess the Trust Fund Recovery Penalty (TFRP) under IRC §6672 — making the individual personally liable for the unpaid payroll taxes of a business. The TFRP equals 100% of the unpaid trust fund taxes (the employee's share of FICA and withheld income taxes). This is not a business liability — it is a personal assessment that can follow the individual through bankruptcy and cannot be discharged.
What the Trust Fund Recovery Penalty Is
When a business fails to pay its payroll taxes, the IRS distinguishes between two components: (1) the "trust fund" taxes — the employee's share of Social Security and Medicare taxes (6.2% + 1.45%) and the federal income tax withheld from employee wages; and (2) the employer's matching share of FICA. The trust fund taxes are called "trust fund" taxes because the employer holds them in trust for the government — they were withheld from employees' paychecks and belong to the Treasury.
Under IRC §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 the trust fund taxes. The TFRP is assessed against individuals, not the business entity — it is a personal liability that survives the business's dissolution or bankruptcy. Multiple individuals can be assessed the same TFRP (the IRS can collect the full amount from any one of them, but cannot collect more than 100% of the underlying trust fund taxes in total).
Who Is a "Responsible Person"?
The IRS broadly defines "responsible person" as anyone with the authority and duty to ensure that payroll taxes are paid. This includes: corporate officers (president, CEO, CFO, treasurer), directors, shareholders who are actively involved in the business, bookkeepers or controllers with check-signing authority, and in some cases, outside accountants or payroll processors who had authority over the business's finances.
The key factors the IRS considers: (1) Did the person have the authority to sign checks? (2) Did the person have knowledge of the unpaid taxes? (3) Did the person make decisions about which creditors to pay? (4) Did the person have the ability to pay the taxes but chose to pay other creditors instead? A person can be a responsible person even if they were not aware of the specific payroll tax delinquency — if they had the authority and duty to ensure taxes were paid, the IRS may assert they were responsible.
The 60-Day Response Window: Do Not Miss This Deadline
Letter 1153 proposes the TFRP assessment and gives the recipient 60 days to protest. This is a critical deadline — missing it results in the IRS assessing the TFRP without further opportunity to contest it administratively. Once assessed, the only recourse is to pay the penalty and file a refund claim, or to challenge the assessment in federal district court or the Court of Federal Claims.
The protest must be in writing and must include: a statement that the person is not a responsible person, or that their failure to pay was not willful, or that the proposed penalty amount is incorrect. The protest should be accompanied by supporting documentation: evidence that the person did not have check-signing authority, did not have knowledge of the delinquency, or took affirmative steps to ensure taxes were paid.
Defense Strategies
"Not a responsible person" defense: The most complete defense — if the individual did not have the authority or duty to ensure payroll taxes were paid, they cannot be assessed the TFRP. Document the corporate structure, the individual's actual role and authority, and who actually controlled the finances.
"Not willful" defense: Even if the person was a responsible person, the TFRP only applies if the failure was "willful." Willfulness means the person was aware of the outstanding tax obligation and either intentionally disregarded it or was reckless in disregarding it. If the person genuinely did not know about the delinquency, or if they took reasonable steps to address it, the willfulness element may not be met.
Allocation of payments: Under Rev. Rul. 73-305, a responsible person can designate payments made to the IRS to apply to the trust fund portion of the liability. If the business made payments to the IRS but the IRS applied them to the employer's share rather than the trust fund taxes, the responsible person can argue that the trust fund liability was reduced by those payments.
Practitioner FAQ
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Book A Strategy Call With A Tax AdvisorFrequently Asked Questions
Verify the notice is legitimate by checking the notice number and comparing it to your filed return. Do not ignore it — most IRS notices have strict response deadlines. Pull your IRS account transcript online at IRS.gov to confirm the assessment matches what the IRS shows on file.
Most IRS notices require a response within 30 days from the date printed on the notice. Some notices, like statutory notices of deficiency, give you 90 days. Missing the deadline can result in default assessments, loss of appeal rights, or escalation to collection action including liens and levies.
Yes. First-time penalty abatement (FTA) is available if you have a clean three-year compliance history — meaning you filed all required returns on time and paid all taxes due for the prior three years. You can request FTA by calling the IRS at 1-800-829-4933 or by submitting a written request.
You have the right to dispute any IRS assessment. File a written protest within the response window explaining why you disagree, attach supporting documentation, and request a conference with IRS Appeals. If the amount is under $25,000, you can use the simplified Collection Due Process (CDP) hearing request.
Yes. The IRS offers installment agreements for taxpayers who cannot pay in full. For balances under $50,000, you can apply online at IRS.gov/OPA. For larger balances, you will need to submit Form 9465 along with Form 433-A (Collection Information Statement) documenting your income and expenses.
An IRS notice alone does not affect your credit score. However, if the balance remains unpaid and the IRS files a federal tax lien (Notice of Federal Tax Lien), that lien becomes a public record and can significantly damage your credit. Paying or resolving the balance before lien filing protects your credit.
For simple issues like verifying a payment or correcting a minor discrepancy, calling 1-800-829-4933 is faster. For complex disputes, penalty abatement requests, or anything involving legal arguments, always respond in writing via certified mail with return receipt so you have proof of timely response.
Yes. Your CPA, EA, or tax attorney can represent you before the IRS using Form 2848 (Power of Attorney). Once filed, the IRS will communicate directly with your representative. This is strongly recommended for notices involving audits, large balances, or potential criminal referrals.
Ignoring an IRS notice triggers an escalation sequence: the IRS will send follow-up notices (CP501, CP503, CP504), then a final notice of intent to levy (LT11 or CP90). After the final notice, the IRS can levy bank accounts, garnish wages, and seize property without further warning.
Yes. The IRS generally has 10 years from the date of assessment to collect a tax debt (the Collection Statute Expiration Date or CSED). After 10 years, the debt expires and the IRS can no longer collect. However, certain actions — like filing an Offer in Compromise or requesting a CDP hearing — can toll (pause) the statute.
Penalties can be abated through FTA, reasonable cause, or statutory exception. Interest, however, is almost never abated — the IRS is required by law to charge interest on unpaid tax from the due date until the date of payment. The only way to stop interest from accruing is to pay the underlying tax balance.
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