What Is IRS Policy Statement 5-133 on Trust Fund Taxes?

When a business fails to pay its trust fund taxes, the IRS can use the Trust Fund Recovery Penalty (TFRP). IRS Policy Statement 5-14 provides guidance to IRS personnel, outlining a framework to help a viable business recover while ensuring tax compliance. The policy states that the IRS will collect delinquent trust fund taxes only once, from either the business or the responsible individuals. This approach recognizes that a business’s survival is often the government’s best chance for full tax recovery, as it allows the company to generate revenue to pay its back taxes, remain a source of employment, and contribute future taxes.

Core Principles of the Policy

Trust fund taxes include amounts employers withhold from employee wages for federal income tax, Social Security, and Medicare. These funds are held “in trust” for the U.S. Treasury. When a business fails to remit these taxes, the IRS can use the Trust Fund Recovery Penalty (TFRP), authorized by Internal Revenue Code § 6672. This penalty allows the agency to hold individuals personally liable for the unpaid amount.

The TFRP is a collection tool, not a punishment. It can be assessed against any “responsible person” who had the duty to collect and pay the taxes and “willfully” failed to do so. A responsible person can be an owner, a corporate officer, or even a bookkeeper with significant control over the company’s finances. Willfulness does not require malicious intent; it means the person knew the taxes were due and intentionally used the funds for other business purposes, such as paying other creditors or meeting payroll.

The policy directs IRS personnel to first evaluate the business’s ability to pay the delinquent taxes. If the business is an ongoing concern with a real prospect of survival, the IRS prefers to collect from the business entity rather than immediately pursuing individuals. If the business can get back on track, the IRS may delay asserting the TFRP against responsible individuals, giving the company breathing room to stabilize.

Criteria for Application

For the IRS to consider delaying personal collection, a business must meet several conditions. An IRS Revenue Officer will analyze the business’s financial situation to confirm it satisfies the following requirements:

• Business viability. The company must be actively operating and demonstrate a realistic capacity to continue. A Revenue Officer will analyze the business’s financial situation to determine if it has sufficient cash flow to meet current expenses and make payments toward its back taxes.
• Current tax compliance. The business must be up-to-date with all tax filing and payment obligations that have arisen since the delinquency. This includes making all current federal tax deposits on time and filing all required returns, such as Form 941, Employer’s QUARTERLY Federal Tax Return. This demonstrates to the IRS that the business is now committed to its tax duties.
• Cooperation with the IRS. The business entity and its management must work transparently with the investigating Revenue Officer. This involves responding to information requests promptly and providing access to financial records. A lack of cooperation can lead the IRS to move directly to personal assessments.
• A formal payment arrangement. The business must agree to an Installment Agreement, which allows it to pay the debt in monthly installments. The IRS will conduct a financial analysis, often requiring the business to complete Form 433-B, Collection Information Statement for Businesses, to establish an affordable payment amount.

The Assessment and Collection Process

The process begins when a business’s trust fund tax delinquency is assigned to an IRS Revenue Officer. The officer’s initial task is to investigate the case and determine if the business is a candidate for a payment arrangement under Policy Statement 5-14. This involves contacting the business, reviewing its operational status, and assessing whether it meets the criteria for viability and compliance.

As part of the investigation, the Revenue Officer must also determine which individuals may be personally liable. This involves conducting interviews using Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty, to establish who qualifies as a “responsible person” and whether their failure to pay was “willful.”

If the Revenue Officer concludes the business is viable and meets all criteria, it will enter into a formal Installment Agreement. As long as the business adheres to this agreement and remains current on all new tax obligations, the IRS will forbear from assessing the TFRP against the responsible individuals. The case is then monitored to ensure ongoing compliance.

This arrangement is conditional. If the business defaults on the Installment Agreement by missing a payment or fails to stay current with its tax requirements, the policy’s protection is revoked. The IRS will then proceed with assessing the Trust Fund Recovery Penalty against all individuals previously identified as responsible, holding them personally liable for the remaining tax debt.