What If My Business Cannot Afford to Pay Employment Taxes: The IRS Trust Fund

Running a business in 2026 comes with no shortage of challenges. Between rising costs, economic uncertainty, and the everyday demands of keeping operations running smoothly, cash flow problems can sneak up on even the most diligent business owners.

And when money gets tight, you're faced with impossible choices.

Here's a scenario that plays out more often than you might think: It's payday. You look at your bank account, and there's not enough to cover everything. You can pay your employees their wages: or you can pay your employment taxes. But you can't do both. What do you do?

The Temptation to "Borrow" From Employment Taxes

Let's be honest. Most business owners in this situation choose to pay their employees. It makes sense on a human level. Your team has bills to pay, families to feed. You tell yourself you'll catch up on the taxes next quarter when that big invoice gets paid.

But here's the problem: the IRS doesn't see it that way.

When you withhold taxes from your employees' paychecks: federal income tax and FICA taxes (Social Security and Medicare): that money doesn't belong to you or your business. It belongs to the government. You're simply holding it "in trust" until you remit it to the IRS.

And when you use that money for anything else? The IRS considers that a serious offense.

Understanding Employment Taxes and Trust Fund Taxes

Before we dive deeper, let's clarify what we're talking about.

Employment taxes include:

●       Federal income tax withheld from employee wages

●       Social Security and Medicare taxes (FICA): both the employee's share and the employer's share

●       Federal unemployment tax (FUTA)

The trust fund portion specifically refers to:

●       Withheld federal income taxes

●       The employee's share of FICA taxes

This distinction matters because the IRS treats trust fund taxes differently. These aren't your business's funds to begin with: they're your employees' money that you've collected on behalf of the government. That's why failing to pay them triggers one of the harshest penalties in the entire tax code.

What Is the Trust Fund Recovery Penalty (TFRP)?

The Trust Fund Recovery Penalty is the IRS's way of ensuring that employment taxes get paid: one way or another.

Here's what makes this penalty especially serious:

●       It's 100% of the unpaid trust fund taxes. Not a percentage. The full amount.

●       It can be assessed against you personally. This means the IRS can go after your personal assets: your bank accounts, your home, your savings: even if your business is an LLC or corporation.

●       It pierces the corporate veil. The protection you thought you had from your business structure? It doesn't apply here.

●       It cannot be discharged in bankruptcy. Unlike many other debts, you can't make this go away through bankruptcy proceedings.

●       Interest keeps accruing. The longer it goes unpaid, the bigger the balance grows.

For example, if your business failed to remit $15,000 in trust fund taxes, both your company and you personally could each face a $15,000 penalty: plus interest. That's potentially $30,000 or more from what started as a $15,000 problem.

Who Is a "Responsible Person"?

The IRS doesn't just look at who signed the checks. They cast a wide net when determining who should be held personally liable for the TFRP.

A "responsible person" can include:

●       Business owners and officers

●       Partners in a partnership

●       Corporate directors or shareholders with authority over finances

●       Employees who have check-signing authority

●       Anyone with control over which creditors get paid

If you had the authority to decide whether to pay the IRS or pay other bills: and you chose other bills: you could be held personally responsible.

And here's the kicker: multiple people can be held liable for the same penalty. The IRS can pursue each responsible person individually for the full amount.

The IRS Interview Process

When the IRS suspects unpaid employment taxes, they'll typically send a Revenue Officer to investigate. This isn't a casual conversation: it's a formal interview designed to determine who should be assessed the TFRP.

During the interview, the IRS will ask questions like:

●       Who had authority to sign checks?

●       Who made decisions about which bills to pay?

●       Who was responsible for filing payroll tax returns?

●       Who had access to the business bank accounts?

●       Were you aware the taxes weren't being paid?

Your answers to these questions: and any documentation you provide: will be used to determine if you're a "responsible person" who "willfully" failed to pay the taxes.

"Willfully" doesn't mean you had evil intentions. It simply means you were aware the taxes were due and consciously chose to pay other creditors instead. That decision you made to pay employees instead of sending taxes to the IRS? That's willful in the IRS's eyes.

What Happens After the IRS Assessment

Once the IRS determines you're liable for the TFRP, you'll receive Letter 1153, which proposes the penalty assessment.

You have 60 days to respond (75 days if you're outside the United States). This is your window to:

●       Appeal the proposed penalty

●       Provide evidence that you weren't a responsible person

●       Negotiate a resolution

If you don't respond within that timeframe, the IRS will formally assess the penalty. After that, they can pursue collection actions against your personal assets, including:

●       Filing federal tax liens

●       Levying your bank accounts

●       Garnishing wages from other employment

●       Seizing property

This is why getting help from an experienced tax attorney in Raleigh NC early in the process is so critical. Once the penalty is assessed, your options become much more limited.

How to Protect Yourself and Your Business

If you're facing cash flow problems and struggling to pay employment taxes, here's what you need to know:

1. Don't ignore the problem. The IRS's penalties and interest will only make things worse over time. Hoping it goes away is not a strategy.

2. Communicate with the IRS. There are options available, including installment agreements and other tax resolution programs. But you have to engage with them.

3. Get professional help immediately. Employment tax issues are among the most serious tax problems you can face. A qualified tax professional can help you understand your options before personal liability is assessed.

4. Document everything. If you weren't truly a "responsible person" with authority over tax payments, documentation can help establish that.

5. Act quickly if you receive Letter 1153. That 60-day window is your best opportunity to challenge the penalty before it becomes final.

The Bottom Line

Running a business means making tough calls every day. But using withheld employment taxes to cover other expenses is a decision that can follow you for years: even decades.

The Trust Fund Recovery Penalty is designed to be harsh. The IRS wants business owners to understand that employment taxes aren't optional and aren't something you can "catch up on later." When you withhold money from your employees' paychecks, that money is held in trust for the government. Period.

If you're already behind on employment taxes, or if you've received notice from the IRS about a potential TFRP assessment, don't wait. The sooner you address the issue, the more options you'll have available.

Need Help With Employment Tax Issues?

At The Law Office of Katie A. Lawson, PLLC, we help business owners in Raleigh and throughout North Carolina navigate complex tax problems: including Trust Fund Recovery Penalty cases. Whether you're trying to prevent personal liability or you've already received Letter 1153, we can help you understand your options and develop a strategy to protect yourself and your business.

Schedule a tax consultation today to discuss your situation. Don't let employment tax issues threaten everything you've worked to build.