While most communication from the IRS gives some cause for concern, Letter 1153 is particularly alarming. Due to your position with a company that owes delinquent payroll taxes, the IRS is attempting to hold you personally accountable for these taxes. If you receive Letter 1153, you must take it seriously and take immediate action to either pay the debt if you rightfully owe it or appeal the IRS’s decision.

To get help now, contact us at Damien’s Law today. Or keep reading to learn what this letter means and how to respond.

Understanding IRS Letter 1153

When an employer withholds taxes from employees’ paychecks, they are not meant to hold on to those funds or use them for any other purpose. They are solely meant to pass those funds along to the IRS. If an employer fails to do so, the IRS will assess a trust fund recovery penalty (TFRP).

Letter 1153 is sent to an employee or officer of a company who the IRS considers a responsible party for the unpaid taxes. If you do not challenge this decision, the IRS will hold you personally liable for the amount due—not the company. 

The Trust Fund Recovery Penalty (TFRP)

Employers collect income and employment taxes from employees’ checks. These include Social Security taxes, Medicare taxes, and income taxes. Employers are meant to hold these in funds in trust—hence the term “trust fund”—and then pay them directly to the IRS by their next due date.

When the company does not pay those taxes to the IRS on their due date, the IRS can take action against the company. If they believe that the person responsible for paying the taxes knew—or should have known—about the taxes and disregarded the law, they can be penalized.

The trust fund recovery penalty is equal to the amount of taxes withheld. For example, if a company owes the IRS $15,000 in withheld taxes, the IRS will then come after them for the original $15,000 owed plus a $15,000 penalty, for a total of $30,000.

Note that the penalty matches the amount of withheld taxes. It does not include the employer’s matching payments for Social Security and/or Medicare.

Who Receives IRS Letter 1153?

The IRS considers a responsible person to be an officer or employee of a company who has a duty to pay withheld taxes. The IRS generally looks at who has control over corporate payments and who has any influence over how company money is spent. For example, a company accountant who pays wages but fails to pay withheld taxes could be considered a responsible party.

In its efforts to recover trust fund taxes, the IRS generally takes a broad view of who is a “responsible person.” This ranges from executives and financial officers to members of a board of trustees and even third-party payroll service providers.

Responsibility and Willfulness

It’s important to distinguish between employees who pay the company’s bills and employees or officers who decide how money is spent. For example, an accounting professional who simply sends payments as directed by those higher up in the organization would likely not be considered a responsible person, as they would not have the power needed to divert funds to or from the IRS.

After figuring out who the responsible party is, the IRS determines whether or not they were willful in their failure to pay taxes to the IRS. The IRS considers willful noncompliance to occur when someone knows or should have known that they needed to pay the trust fund taxes to the IRS. Even in matters where a person mistakenly thinks they need to pay other creditors before paying the IRS, the IRS still has genuinely considered that to be willful noncompliance.

It is fairly difficult to claim reasonable cause as a defense against responsibility for the TFRP penalty, but not impossible. If you’re considering this route, it’s important to discuss your options with a tax professional before moving forward.

Responding to IRS Letter 1153

Assuming that you live within the United States, you have 60 days from the date of mailing listed on Letter 1153 to appeal the decision made by the IRS. If you agree with the penalty, you simply have to sign Form 2751—which should be attached to Letter 1153—and send it to the IRS. They will then bill you for the amount due.

If the letter is addressed to a recipient outside the United States, the appeal window is 75 days instead of 60 days.

Appeal Process

If you disagree with the IRS’s decision that you are personally responsible for the TFRP—and most people do disagree with a 100% penalty—you should move quickly and review the appeals process. If the proposed penalty amount is $25,000 or less, you can proceed with a Small Case Request. A Small Case Request requires you to draft a letter listing the reasons you disagree with the IRS’s decision. You must also state that you want an appeal conference.

Typically, a strong Small Case Request letter will delve into issues of responsibility and willfulness. You either want to prove that you were not the responsible party or that your noncompliance was non-willful. You may want to explain your specific duties and responsibilities within your company, as well as any limitations that would keep you from being declared a responsible person. You should submit two copies of your Small Case Request.

If the proposed penalty amount is more than $25,000, you must submit a formal Written Protest. You must include a written statement of fact that is signed under penalty of perjury. The written statement should specify why you believe you should not be charged with the penalty. Much like a Small Case Request, these statements generally focus on the issues of responsibility and willfulness. Ensure that your statement of facts includes a statement indicating that you are agreeing with the contents of the letter under penalty of perjury.

Consequences of Ignoring IRS Letter 1153

You never want to ignore a notice or letter from the IRS, but when you are dealing with Letter 1153, you really don’t want to delay a response. If you fail to respond to the letter in a timely manner, the IRS will proceed with the assessment of the proposed penalty. At that point, you are considered personally responsible for the bill and the IRS will proceed with collection actions against you. 

Considering the size of this penalty, you could be left with an unreasonable tax bill that leads to levies and liens. Settlement offers such as an offer in compromise can be impossible to get approved for trust fund recovery penalties—The IRS takes this penalty very seriously. If you continue to ignore notices about the penalties assessed, the interest and other penalties will continue to accrue until you address the debt.

Avoiding TFRP Assessment

Obviously, the best way to avoid a TFRP is to avoid falling behind on payments in the first place. By looking into your compliance and payment practices, you can stay compliant with IRS regulations. Consider the following:

Compliance Practices

First, it’s important to understand when and how you must pay your trust fund taxes. Many companies keep their trust fund taxes entirely separate from other funds, as this ensures that the money isn’t unintentionally used for other expenses or debts. This is particularly helpful for companies that maintain a tight budget or often come close to emptying their accounts, as companies in this situation are more likely to dip into their trust fund taxes unintentionally.

For example, there are many types of payroll software that will withdraw both taxes and payments to your employees. Then, the software company holds onto the taxes and remits them for you so that you don’t have to worry about keeping them in your account and paying them on your own.

Each company should also have a chain of command to handle trust fund taxes. This ensures that if one person fails to make payments, the issue will be caught immediately by the next person in the chain of command. Even if errors do occur, this prevents the error from turning into a full-blown compliance issue.

Managing Trust Fund Taxes

One of the most important pieces of advice is never to use trust fund taxes as extra capital during a lean period. This is how many companies’ tax issues start—they assume that a temporary lean period will give way to a more profitable period, at which point they can replenish the tax money they were meant to withhold. 

As expenses build up, they never get the chance to get ahead. This leads to even greater penalties as they fall further and further behind. If your company struggles with keeping trust fund taxes separate from other funds, a business financial planner can help you come up with a strategy that keeps you compliant.

Common Mistakes When Dealing With TFRP and Letter 1153

You do not want to throw away your chance at appealing the IRS’s decision in this matter. Avoid these common mistakes to build the strongest case you possibly can.

• Assuming that the IRS made a mistake: If you think it’s obvious that you’re not the responsible person for your corporation, you may assume that the IRS will realize that and then send the letter to the correct person. If you’ve received this letter, they have done their due diligence and decided that you are the responsible person. This is not a mistake.
• Waiting too long to respond: The 60-day appeal window closes quickly, especially if you’re caught up in other issues with your business. It’s important to discuss this letter and your plan with a tax pro as quickly as possible so you can take action.
• Not addressing issues of responsibility and willfulness in your letter: When you appeal their decision, you must convince the IRS that their initial decision was made in error. The two main factors in a TFRP assessment are responsibility and willfulness. If your letter rambles on without addressing these issues, it will likely not do much to sway them in your favor.
• Not being specific enough in your letter: Whether you are disputing responsibility or willfulness, you must be specific when telling the IRS why you should not be held liable for the penalty. This may mean providing details about your role within your company or details about how your company handles taxes and why that shows that your noncompliance was non-willful.

TFRP Examples

Wondering if you have a good chance of winning your appeal? Still unsure of the TFRP and its role in your current situation? These examples may provide some clarity:

• You misunderstood your trust fund tax payment schedule. The IRS requires some companies to pay daily, some to pay semi-monthly, some to pay monthly, and very few to pay annually. If you genuinely believed you were on a less-frequent schedule and your non-payment was unintentional, you may be able to claim non-willfulness.
• A natural disaster has derailed financial operations at your company. If a massive earthquake, fire, or flood has taken your company offline and required immediate action and attention, it’s natural for taxes to fall lower on your to-do list. If you are able to remedy the situation quickly, the IRS may agree with your appeal request.
• Your company owed suppliers a substantial amount of money. Without payments to suppliers, your business would have had to shut down and you would not have been able to continue paying your employees. This is not a good reason to not pay your trust fund taxes; IRS debt generally takes precedence over other debts. The penalty would likely stand in this scenario.

At Damiens Law, we understand how worrisome it can be to receive an unexpected letter from the IRS—especially when that letter claims you owe tens or hundreds of thousands of dollars. The sooner you contact us after receiving Letter 1153, the sooner we can begin helping you with your appeal. Call us at 610-476-1361 or contact us online.

Frequently Asked Questions

I pay my company’s bills—am I a responsible person?

You may or may not be considered a responsible person. Much depends on how much control you have over the funds—do you just take the list of bills provided by your employer and pay them, or do you have a hand in your company’s finances that allows you to decide how and when expenses are paid? These are factors the IRS will want to know about when considering your appeal.

I delegate bill payments to someone else in my company, how can I be a responsible person?

Even if you delegate financial matters to someone else within your business, you can still be considered a responsible person if trust fund taxes are not paid. The IRS may consider you ultimately responsible for how funds are used.

What if I disagree with the amount they say I owe?

Be prepared to show records of trust fund tax payments and errors in their calculations. Even if you do owe the penalty, this may help you decrease the penalty.

Should I hire an attorney to handle the TFRP penalty?

This is an issue that definitely warrants the help of a tax attorney. Few tax errors result in a 100% penalty, and if you don’t address this problem swiftly and efficiently, you could be paying this debt off for years.