Fighting an Assessed Trust Fund Penalty: Divisible Payments, Form 843 and Refund Suits

People miss the Letter 1153 deadline for all kinds of reasons. The letter went to an old address. They thought the business would handle it. They were overwhelmed. Whatever the reason, the Trust Fund Recovery Penalty was assessed without a protest.

That does not end the fight over whether you owe it. It changes the procedure. To challenge an assessed TFRP on the merits, you generally pay a piece of it, file a refund claim, and, if the IRS denies the claim, sue for a refund in federal court. Along the way, the government can ask the court to decide the rest.

Why You Only Have to Pay a Piece

A refund suit is, by definition, a suit to recover money already paid; IRC 6532 describes it as a proceeding for the recovery of any internal revenue tax or penalty. If you had to pay the entire TFRP first, most people could never get to court. The Trust Fund Recovery Penalty, however, is treated as divisible. Congress recognized that in IRC 6331(i)(2), which defines "divisible tax" to include taxes imposed by subtitle C and the section 6672 penalty with respect to those taxes.

IRM 5.7.7.5 explains the IRS's procedure. To file a claim for refund of a TFRP assessment, for each applicable tax period the taxpayer must pay the portion of the penalty attributable to one employee, if the TFRP is based on employment taxes. A separate Form 843, Claim for Refund and Request for Abatement, is required for each period the taxpayer wants considered.

The IRM adds that credit offsets count as payments, but there still must be one payment per quarter. If you do not have a payment or offset for a quarter within two years of filing the Form 843, you must make one.

The Two-Year Window on Payments

IRM 5.7.7.5 says the IRS will generally consider TFRP refund claims, and related abatement of unpaid portions, if filed within two years after the date the required payment was made. IRM 5.7.7.5.1 tells the reviewing unit to identify payments or credits made within two years of the Form 843 filing, because those are the only amounts that may be considered for refund under IRC 6511(a).

That has a sharp consequence. If you paid on a TFRP for years before filing a claim, older payments may not be refundable even if you win. IRM 5.7.7.5.1 notes that if the taxpayer is determined not to be responsible, payments made beyond the two-year period may not be refunded and must be transferred to excess collections. Do not wait.

What to Put in the Form 843

Treat the explanation section of each Form 843 as a short protest. Identify the business, its EIN and the quarter. State the payment you made and its date. Then explain, with specifics, why you were not a responsible person or did not act willfully for that quarter, and attach the documents that prove it: resignation letters, minutes, signature card changes, emails showing who directed payments. A claim that only says "I am not liable" gives the reviewer nothing to work with and sets up a thin record for any later suit.

Who Reviews the Claim

TFRP claims are worked by the IRS's Civil Enforcement Advice and Support Operations, called CEASO, in the office where the claimant resides. Under IRM 5.7.7.5.1, CEASO date-stamps the claim, completes an initial review within 30 days, and checks whether the claim is processable: the taxpayer and periods can be identified, the required payment was made, and some explanation is provided.

CEASO also reviews the original TFRP file for procedural defects and whether your rights were protected, including the third-party contact and summons notice rules. The IRM notes that some procedural defects may invalidate the assessment.

One limit: if Appeals already made a determination on the TFRP, whether after a Letter 1153 protest or otherwise, neither CEASO nor field collection can reverse it. The claim goes to Appeals. Appeals keeps it if the issue is the same as before, and returns it to CEASO if the issue is new.

Possible Outcomes

Claim allowed

CEASO notifies you in writing, initiates release of any bond, and requests abatement and refund. Amounts outside the two-year window go to excess collections, and you are told so.

Claim denied, no bond posted

Under IRM 5.7.7.5.4, CEASO mails Letter 3784 by certified mail. It notifies you of the disallowance and of the two-year period to file suit. It also gives you 30 days to request an Appeals conference. Fast Track Mediation may be offered, but the IRM reminds employees to tell taxpayers that the timeframes for formally appealing and filing suit still apply.

Claim denied, bond posted

If you met the bond requirements of section 6672(c), CEASO sends Letter 3783, telling you that you have 30 days to file suit if you want collection to remain stayed. Our bond guide covers that path.

The Lawsuit

IRC 6532(a)(1) sets the timing. You may not begin a refund suit until six months after filing the claim unless the IRS decides the claim sooner. And you may not begin it more than two years after the IRS mails, by certified or registered mail, a notice of disallowance of the claim. That two-year period can be extended by written agreement, and section 6532(a)(4) warns that reconsideration by the IRS after mailing the disallowance does not extend it.

Section 6672(c)(2) refers to refund proceedings over this penalty in the appropriate United States district court or the Court of Federal Claims. Those are the forums for a TFRP refund case.

Expect a counterclaim. IRM 5.7.7.5 notes that if the taxpayer files suit, the government will place the unpaid portion of the TFRP before the court by means of counterclaim. You sue to get back the one-employee payment. The government asks the court to enter judgment for everything else. The whole liability is on the table.

Levy Protection During the Suit

IRC 6331(i) provides that no levy may be made on your property for an unpaid divisible tax while a proceeding you brought in a proper federal trial court for recovery of a portion of that tax is pending, if the decision would be res judicata, or would collaterally estop you, as to the unpaid tax. During that period, the government also may not start a court collection proceeding, other than a counterclaim, and the collection statute is suspended.

There are exceptions. The protection does not apply if you file a written waiver, if the IRS finds collection is in jeopardy, to refund offsets, or to levies first made before the proceeding began. IRM 5.7.7.5.2 cross-references this rule and IRS Policy Statement 5-16 on forbearance.

Refund Claims and CDP

Refund claims interact with Collection Due Process. The Appeals manual, IRM 8.22.8, addresses a CDP request filed while a Form 843 is pending and lists receipt of a claim disallowance letter offering Appeals review as a prior opportunity to dispute the liability. Coordinate the two so that one does not undermine the other. See our CDP guide.

Practical Checklist

1. Identify every quarter you want to contest.
2. For each quarter, pay at least the portion attributable to one employee, or confirm a qualifying credit offset within two years.
3. File a separate Form 843 for each quarter with a clear explanation of why you were not responsible or not willful.
4. Keep certified mail proof of filing.
5. Calendar six months from filing, and two years from any disallowance.
6. If you can post a bond within 30 days of notice and demand, consider the section 6672(c) path to stop collection on the rest.
7. Decide on forum and prepare for a government counterclaim.

For more on the firm's approach to payroll tax disputes, see the main site's payroll tax page.

Missing Letter 1153 costs you a free shot at Appeals. It does not cost you your day in court. Call (813) 229-7100 and let's talk.