Can the IRS collect payroll taxes from a business owner personally? In some cases, yes.
When a business fails to pay certain federal payroll taxes, the IRS may pursue more than the business itself. Through the Trust Fund Recovery Penalty, the IRS can potentially hold certain business owners, officers, managers, employees, and other responsible individuals personally liable for the unpaid trust fund portion of those taxes.
That does not mean every business owner automatically becomes personally liable when a company falls behind on payroll taxes.
The IRS generally must establish two separate elements:
- The individual was a responsible person for the trust fund taxes; and
- The individual willfully failed to collect, account for, or pay those taxes over to the government.
If both requirements are satisfied, a business tax problem can become a serious personal tax problem.
For a broader explanation of the penalty itself, see What Is the Trust Fund Recovery Penalty?
When Can the IRS Collect Payroll Taxes From a Business Owner Personally?
The IRS may seek to collect certain unpaid payroll taxes from a business owner personally when the facts support assessment of the Trust Fund Recovery Penalty, commonly called the TFRP.
Federal payroll taxes include amounts withheld from employees’ wages for federal income tax and the employee share of Social Security and Medicare taxes.
These amounts are commonly referred to as trust fund taxes because the employer holds them in trust for the United States until they are paid to the IRS.
When those taxes are not paid, the IRS may investigate the individuals associated with the business to determine whether one or more of them should be held personally liable.
The IRS does not need to wait until the business closes before considering the TFRP. The business can still be operating while the IRS investigates potential personal liability.
What Payroll Taxes Can Become a Personal Liability?
The Trust Fund Recovery Penalty generally applies to the trust fund portion of unpaid employment taxes.
That typically includes:
- Federal income taxes withheld from employees’ wages; and
- The employee portion of Social Security and Medicare taxes withheld from wages.
The penalty is generally equal to the unpaid trust fund tax amount.
That distinction is important because the TFRP is not simply a transfer of every tax, penalty, and interest charge appearing on the business’s payroll tax account.
Instead, the personal assessment generally relates to the amounts the business withheld or was required to hold in trust and pay to the federal government.
Does Owning the Business Automatically Make You Personally Liable?
No.
Business ownership is relevant, but ownership alone does not automatically establish personal liability for unpaid payroll taxes.
The IRS must evaluate whether the owner had sufficient responsibility for the trust fund taxes and whether the owner acted willfully.
A passive investor who owns part of a business but does not participate in financial decisions may present a very different situation from an owner who controls payroll, directs payments, and decides which creditors receive company funds.
The IRS focuses on the individual’s actual status, duties, authority, and financial control.
For a detailed discussion of who may potentially face personal liability, see Who Can Be Held Personally Liable for the TFRP?
What Makes a Business Owner a Responsible Person?
Responsibility under the TFRP is based on the individual’s actual role in the business.
The IRS describes responsibility as a matter of status, duty, and authority.
A responsible person may have:
- Authority over business financial affairs;
- The ability to determine which creditors are paid;
- Control over payroll or other disbursements;
- Authority to sign business checks;
- Involvement in employment tax returns;
- Authority to hire or fire employees; or
- Control over the company’s voting stock.
No single factor necessarily determines the outcome.
For example, having check-signing authority does not automatically make someone a responsible person if that authority was merely mechanical or exercised at the direction of someone else.
Likewise, an individual without a prominent title may still be considered responsible if that person exercised significant control over the company’s financial affairs.
For more on this issue, see How Does the IRS Determine Who Is a Responsible Person for the TFRP?
Does the IRS Have to Prove Willfulness?
Yes.
Responsibility alone is not enough.
The IRS must also establish that the responsible person acted willfully with respect to the unpaid trust fund taxes.
Willfulness does not necessarily mean fraud, dishonesty, or an intention to harm the government.
The IRS defines willful conduct broadly to include intentional, deliberate, voluntary, reckless, or knowing conduct rather than accidental conduct.
Generally, the government must show that the responsible person knew, or should have known, about the unpaid taxes and either intentionally disregarded the obligation or was plainly indifferent to it.
This is an important distinction because a business owner may have been trying to keep the company alive rather than trying to evade taxes.
However, business motives do not necessarily eliminate potential TFRP liability.
For more about this requirement, see What Does Willfulness Mean for the Trust Fund Recovery Penalty?
Can Paying Other Business Expenses Create Personal Exposure?
It can.
The IRS specifically identifies the use of available business funds to pay other creditors while employment taxes remain unpaid as an indication of willfulness.
This frequently becomes an issue when a business is experiencing financial distress.
An owner may choose to pay employees, suppliers, landlords, lenders, utilities, insurance, or other expenses in an effort to keep the company operating.
Those decisions may seem necessary from a business perspective.
But if the owner knows that trust fund taxes are unpaid, using available funds to pay other creditors can create significant personal exposure under the TFRP.
Can the IRS Collect From You Personally Even if the Business Is an LLC or Corporation?
Yes, potentially.
The existence of a corporation or limited liability company does not automatically prevent the IRS from assessing the Trust Fund Recovery Penalty against an individual.
The TFRP creates a separate basis for personal liability under federal tax law.
That means a business owner cannot assume that the liability protection normally associated with a corporation or LLC will automatically prevent the IRS from pursuing the unpaid trust fund taxes personally.
At the same time, merely owning an LLC or corporation is not enough by itself to establish TFRP liability.
The IRS must still establish responsibility and willfulness.
Can the IRS Collect From More Than One Business Owner?
Yes.
More than one person may be considered responsible for the same unpaid trust fund taxes.
For example, two business owners may both exercise significant financial authority, or an owner and a financial officer may both have sufficient responsibility.
Each person’s potential liability is evaluated separately.
The IRS does not have to identify only one individual as the responsible person.
However, the government is not entitled to collect the same underlying trust fund tax more than once.
The IRS Internal Revenue Manual states that responsible persons may be jointly and severally liable, while the full unpaid trust fund amount is collected only once from the business, responsible persons, or a combination of them.
Can the IRS Go After Personal Bank Accounts?
If the TFRP is assessed against an individual, the liability becomes that person’s federal tax obligation.
At that point, the IRS may use federal tax collection remedies against the individual’s property and rights to property, subject to applicable collection procedures.
Potential consequences can include:
- Federal tax liens;
- Levies against personal bank accounts;
- Levies against wages or other income; and
- Other available collection action.
The IRS expressly warns that once the TFRP is asserted, collection action may be taken against personal assets.
This is why unpaid business payroll taxes should not be viewed solely as a business-level problem when potentially responsible individuals are involved.
Can the IRS Collect From a Business Owner After the Business Closes?
Potentially, yes.
Closing a business does not necessarily eliminate potential TFRP liability for trust fund taxes that went unpaid while the owner was responsible for the business’s financial affairs.
The IRS may continue investigating former owners, officers, managers, and employees after the business stops operating.
The relevant questions still involve the individual’s responsibility and willfulness during the periods when the trust fund taxes were not paid.
For an owner who assumes that closing the business ends the payroll tax problem, a later TFRP investigation can come as a significant surprise.
What If the Business Is Still Operating?
The IRS can investigate potential TFRP liability even while the business continues operating.
The business does not have to fail, dissolve, or close before the IRS considers personal liability.
This can create two related issues at the same time:
- The business remains liable for its employment tax obligations; and
- One or more individuals may be investigated for potential personal liability.
As a result, an IRS payroll tax matter can involve both business collection issues and personal exposure for the people who managed the company’s finances.
What if Someone Else Was Supposed to Handle Payroll Taxes?
The fact that another employee, bookkeeper, accountant, or payroll company was assigned responsibility for payroll taxes does not automatically eliminate potential liability.
The IRS looks at the actual financial authority exercised by each individual.
Someone with ultimate authority over the business’s financial affairs generally cannot avoid responsibility merely by delegating financial duties if that person retained significant control.
At the same time, an employee whose role was limited to performing ministerial tasks at the direction of others may present a different situation.
The IRS recognizes this distinction in its own guidance.
Can a Business Owner Be Personally Liable if There Was No Fraud?
Yes.
Fraud is not required for the Trust Fund Recovery Penalty.
A business owner may have acted in good faith from a business perspective and still face potential personal liability under the TFRP.
For example, the owner may have used limited funds to keep employees working, complete projects, or preserve the business.
The owner may not have intended to evade taxes.
But if the IRS establishes responsibility and willfulness, the absence of an evil motive or bad intent does not necessarily prevent the penalty.
How Serious Is Personal Liability for Unpaid Payroll Taxes?
It can be very serious.
Once the IRS assesses the TFRP against an individual, the unpaid trust fund taxes are no longer merely a corporate or business liability.
They become a personal federal tax debt.
This can expose personal assets and income to IRS collection and can remain an issue even if the underlying business later closes.
For owners of businesses with substantial unpaid payroll taxes, the potential assessment can be significant because the TFRP may equal the full unpaid trust fund portion of the liability.
That is why understanding whether the IRS is merely collecting from the business or investigating individuals for personal liability is important.
What If the IRS Is Investigating You Personally?
A TFRP investigation is different from an ordinary business collection matter.
The IRS may be determining whether the company’s unpaid trust fund taxes should also become your personal federal tax liability.
The outcome depends on the facts surrounding your actual authority, responsibilities, knowledge, and conduct during the relevant periods.
Being an owner does not automatically establish personal liability.
But being shielded by a corporation or LLC does not automatically prevent it either.
GMD Tax Law represents taxpayers facing unpaid federal employment taxes, TFRP investigations, and IRS collection matters.
Learn more about representation for these cases on our IRS Trust Fund Recovery Penalty Help page.
Massachusetts Attorney for IRS Payroll Tax and TFRP Matters
The IRS can, in appropriate cases, collect certain unpaid payroll taxes from a business owner personally through the Trust Fund Recovery Penalty.
But personal liability is not automatic.
The IRS must establish that the individual was responsible for the trust fund taxes and acted willfully.
Those determinations depend on the facts surrounding the individual’s actual role in the business.
GMD Tax Law represents business owners and other individuals facing IRS payroll tax collection and potential personal liability for unpaid trust fund taxes.
If the IRS is investigating whether you should be held personally liable for unpaid business payroll taxes, contact GMD Tax Law to schedule a consultation.
Learn more about our IRS Tax Relief services.
