How to Fight the Trust Fund Recovery Penalty After Receiving IRS Letter 1153

Receiving IRS Letter 1153 is a sign that the IRS is on the cusp of personally assessing you for a business’s unpaid payroll taxes. The IRS takes unpaid payroll taxes very seriously and goes to great lengths to recover them. When they’re unable to recoup their losses from the business, they identify a “responsible person” and assess the Trust Fund Recovery Penalty. 

If you’ve just received the letter, you still have time—but that window is closing quickly. Learn more about the Trust Fund Recovery Penalty and how to avoid personal assessment. Or get legal assistance now by contacting the W Tax Group. 

Key Takeaways

• Before assessing the Trust Fund Recovery Penalty, the IRS sends Letter 1153 to inform you of the proposed assessment.
• Your options include formally appealing, accepting the assessment, or contacting the IRS revenue officer assigned to your case.
• You typically only have 60 days to appeal.
• If you wait too long, the IRS will assess the penalty and take collection actions against you personally.

What is the Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty is a penalty based on the trust fund portion of unpaid payroll taxes. It’s 100% of taxes withheld (or supposed to be withheld) from employees’ checks that were not paid. This penalty can be assessed against individuals, rather than the company itself. 

When businesses collect payroll taxes from employees’ paychecks, they hold the collected funds in trust for the government. The business is only meant to hold onto these funds until their next scheduled deposit date, at which point they transmit the funds to the government. This is an important distinction—it shows that the collected funds belong to the government from the moment they are taken out of employees’ paychecks. The IRS views not transmitting those funds as theft from the government.

While the IRS does attempt to collect these taxes from the business itself whenever possible, those efforts are not always successful. For example, the business may be insolvent. or it may have shut down. In those cases, the IRS tries to identify a “responsible party” and attempts to collect the Trust Fund Recovery Penalty from them. The TFRP is equal to the amount of the unpaid taxes.

The responsible person may be the owner of a business, an executive with decision-making authority, a manager with authority over payroll decisions, or anyone with the authority and responsibility to pay taxes. The IRS can identify a responsible party who willfully failed to transmit payroll taxes and hold them personally liable for the penalty.

An Overview of Letter 1153

IRS Letter 1153 indicates that the IRS is proposing to assess a TFRP against you personally. The letter includes the name of the business, the person to whom the letter is addressed, an overview of the Trust Fund Recovery Penalty, and information on what steps to take next. This letter comes with Form 2751, which explains the taxes owed by the business.

How to Respond to Letter 1153

It’s important to read Letter 1153 carefully, because it outlines exactly what you should do next, depending on whether or not you accept your role as a responsible party and the amount due. Here are the main options:

Agree with the assessment

First, if you accept the assessment and your role as a responsible party, you can just sign part one of Form 2751 and send it back to the IRS. However, if you accept their proposed assessment, you are personally liable for the entirety of the TFRP. The IRS can then use enforced collection actions to recover what they are owed.

Contact a revenue officer for an informal review

Alternatively, you may disagree with the penalty or your role as a responsible person. If so, you have ten days from the date listed on the letter to reach out to the person named on the letter. You can provide additional information and attempt to resolve the matter informally. Look for the name by the “Person to Contact:” line. This is the revenue officer who will handle your informal review request.

Request mediation

Another option to consider is IRS Fast Track Mediation. This is a voluntary mediation program that gives you a quicker way to resolve a tax problem without going through the traditional appeals process. The process is overseen by a mediator from the IRS Independent Office of Appeals, who facilitates settlement discussions and attempts to help you and the IRS find common ground. If Fast Track doesn’t work out for you, you can still go the conventional appeals route.

Appeal the proposed penalty assessment

However, you also have the right to formally appeal or protest the Trust Fund Recovery Penalty. Your written appeal must be sent to the IRS within 60 days of the date of the letter; you have 75 days if the letter is sent to you outside the United States.

It is absolutely essential that you carefully watch the deadline for a response. If you do not either come to an agreement with the IRS or formally appeal their assessment by the appeal deadline, they will assess the penalty. You will then be personally liable for the entirety of the penalty. Your personal assets, income streams, and bank accounts will be at risk. Requesting a review or mediation does not give you extra time. To be on the safe side, you may need to enter an appeal even if you’re talking with a revenue officer or going through mediation. 

How to Deal with Form 2751

Form 2751 comes with Letter 1153. If you agree with the assessment and accept the Trust Fund Recovery Penalty, you can sign the form and return it to the IRS. If you are disputing the assessment, ensure that you do so in writing before the appeal deadline passes. In your request for an appeal, provide additional information that backs up your belief that you should be responsible for the penalty. 

If you filled out Form 4180 as part of the IRS’s investigation regarding misused trust funds, you can refer back to it and use it to strengthen your case.

Potential Defenses Against the Trust Fund Recovery Penalty

There are several potential defenses against the Trust Fund Recovery Penalty. We recommend discussing these with a tax attorney. Advocating for yourself against the IRS can be very challenging, particularly with something as serious and financially consequential as the Trust Fund Recovery Penalty. Here are the main defenses taxpayers tend to use when fighting this penalty.

Not the Responsible Party

You may be able to demonstrate that you were not a responsible party as far as the TFRP is concerned. If you had no control over financial decisions, no role in payroll or tax filings, and no authority over how business finances were used, you may not qualify as a responsible person. 

This is often the case for individuals who have a title that makes it sound as if they have a major role in a business’s finances, but no actual authority when it comes to the business’s operations.

Did Not Act Willfully

Assessment of the Trust Fund Recovery Penalty requires willfulness. This means that you must have known or that you should have known that the taxes were due and unpaid. However, it’s not uncommon for a business that is starting to have financial problems to have issues with transparency. 

You may never have been in a position to know about the company’s unpaid taxes, or you may have even been outright lied to about your company’s tax compliance. For some people, the first time they find out about their company’s tax issues is when they receive Form 4180 from the IRS. If you did not know about the issues at all or took reasonable steps to address the issues once you did become aware of them, you may have a valid defense.

Special Circumstances

There are circumstances that lie outside these categories. Perhaps, the business was the victim of fraud or embezzlement. When this occurs, the people who could catch and stop the fraud—the same people who could reasonably be considered responsible persons by the IRS—may be provided falsified documentation or otherwise misled. An individual who is denied access to financial records is in no position to repair any financial problems that are occurring.

No matter what defense you pursue, be ready to prove that your claims are true. The IRS requires credible documentation. For example, if you were denied access to financial records, you may provide proof of your attempts to access the company’s financial records and database, as well as your efforts to request records from others within the company. If you were not a responsible person as far as the TFRP is concerned, you may provide a copy of your job description, an explanation of your day-to-day work, and describe information you did and did not have access to.

Are You Protected If the Business Closes or Goes Bankrupt?

No. There are certain tax debts that are not dischargeable in bankruptcy, including tax debts less than three years old, sales tax debts, and the trust fund portion of payroll tax debts. Even if the business closes or goes bankrupt, you may be personally liable for some taxes.

Personal Bankruptcy

To go one step further, you are also not protected if you personally go bankrupt. The Trust Fund Recovery Penalty is exempt in bankruptcy proceedings and will still be due after the automatic stay is lifted. At that point, the IRS can collect via liens, levies, wage garnishments, and bank account seizure.

Your Next Steps If the Penalty Is Assessed

If you received Letter 1153 and did not respond before the 60- or 75-day deadline, the TFRP has already been assessed. You may still have options. If there’s new evidence that was not available to you during the initial 60-day window, you may be able to request an appeal based on the discovery of new evidence, but in most cases, you will only be able to appeal if you pay the tax first and then request a refund. 

Unfortunately, taxpayers rarely, if ever, can get reasonable cause penalty abatement for the TFRP. But if you have limited income and assets, you may qualify to settle the penalty with an offer in compromise. 

If you’ve explored every path and there’s no way to get out of the assessment or have the penalty abated or settled, you should contact a tax attorney. They can help you determine your next steps and set up an installment agreement if applicable.

When to Talk to a Tax Pro

In any situation involving the Trust Fund Recovery Penalty, we recommend talking to a tax professional. Some taxpayers worry that hiring an attorney makes them look “guilty,” but that is not the case – the IRS expects taxpayers to work with professionals through these types of cases. 

This is typically a far more serious tax situation than unpaid income taxes or unfiled tax returns; this penalty can easily leave an individual saddled with tens or hundreds of thousands of dollars in tax debt that cannot be discharged in bankruptcy. 

If you’ve been asked to complete an IRS interview form regarding your work duties or received Letter 1153 in the mail, it’s time to talk to a tax relief attorney or company about your risk of personal liability, your legal options, and how to protect your assets.

If the IRS is proposing a TFRP assessment, you have a very limited window in which you can dispute their decision and protect yourself. Don’t wait—talk to a tax attorney about what comes next. Call W Tax Group at 877-500-4930 or contact us online to discuss your case and get the guidance you deserve. Check out this guide on what to expect during the initial consultation if you’re curious about the process.

Sources:
https://www.irs.gov/irm/part5/irm_05-007-006
https://www.irs.gov/irm/part5/irm_05-019-014r
https://www.irs.gov/appeals/fast-track
https://www.taxpayeradvocate.irs.gov/news/success-stories/trust-fund-recovery-program-penalty-abated-saving-officer-millions-of-dollars/2025/05/