Payroll Tax Attorney

Call (619) 378-3138 to speak with a payroll tax attorney.

Payroll tax enforcement is the IRS's most aggressive collection program. The mechanics are simple: businesses are required to withhold federal income tax, Social Security, and Medicare from employee wages, match the FICA contributions, and deposit those funds to the IRS on a weekly, semiweekly, or monthly schedule. When a business falls behind — whether from a cash flow crisis, a bookkeeping failure, or a deliberate decision to defer — the IRS moves fast and the consequences are personal. The tax does not stay with the company. It follows the individuals who controlled the company's finances.

Brotman Law has represented businesses and individuals in payroll tax disputes at every stage: initial IRS contact, Revenue Officer visits, civil fraud penalty investigations, EDD Employment Tax Audits, and U.S. Tax Court litigation. This page describes our defense practice. For an explanation of how payroll taxes work mechanically, see our payroll tax guide.

What Counts as a Payroll Tax Problem

Payroll tax problems come in several distinct forms, each with a different enforcement mechanism and a different defense approach:

• Form 941 non-filing: Failure to file quarterly federal payroll tax returns. The IRS can prepare a substitute return (SFR) and assess tax plus failure-to-file penalties under IRC § 6651(a)(1).
• Failure to deposit: Timely filing without timely deposit. Failure-to-deposit penalties under IRC § 6656 range from 2% (1–5 days late) to 15% (more than 10 days after the first delinquency notice). These stack quickly.
• Trust Fund Recovery Penalty (TFRP): The personal liability assessment under IRC § 6672. This is the one that follows individuals out of bankruptcy and beyond the life of the business. See the deep-dive below.
• EDD Employment Tax Audit: California's Employment Development Department audits employer payroll records independently of the IRS. EDD has broad authority to reclassify workers, assess unreported wages, and impose penalties — including personal liability assessments similar to the federal TFRP.
• Worker classification disputes (1099 vs. W-2): When the IRS or EDD determines that workers treated as independent contractors should have been classified as employees, back employment taxes, penalties, and interest are assessed for every misclassified worker for every open year.

The Trust Fund Recovery Penalty

The Trust Fund Recovery Penalty (TFRP) is the IRS's mechanism for holding individuals personally liable for a company's undeposited payroll taxes. It covers only the "trust fund" portion of payroll taxes — the amounts withheld from employee wages (income tax withholding and the employee's share of FICA). The employer's matching FICA contribution is not part of the trust fund and is not subject to the TFRP.

The controlling statute is IRC § 6672. The IRS can assess the TFRP against any person who: (1) was a "responsible person" — someone with authority over the company's finances — and (2) "willfully" failed to collect, account for, or pay over the trust fund taxes. Both elements must be present. The IRS targets a wide group: majority shareholders, CEOs, CFOs, controllers, bookkeepers with check-signing authority, even board members who approved payroll budgets while knowing taxes were not being deposited.

The Liability Exposure

The TFRP equals 100% of the unpaid trust fund taxes. If a business has $500,000 in undeposited payroll taxes and $300,000 of that is trust fund (employee withholding), the TFRP assessment against each responsible person is $300,000 — regardless of how many people are assessed. The IRS can assess the full amount against five individuals simultaneously. It cannot collect more than 100% in total, but each person is on the hook for the entire amount until it is paid.

How We Defend TFRP Cases

There are two primary defense strategies in TFRP matters, and they are not mutually exclusive.

Disputing responsible person status. The IRS has to prove that you had the authority and the duty to see that the taxes were deposited. If your role at the company did not give you actual authority over tax deposits — if someone else controlled the bank accounts, if you were a passive investor, if you relied on a CFO or bookkeeper who withheld the relevant information from you — responsible person status can be challenged. The IRS's definition of "responsible person" is broad, but it is not unlimited.

Disputing willfulness. Willfulness under § 6672 does not require intent to defraud — it means the responsible person knew the taxes were not being deposited and allowed other creditors to be paid instead. But willfulness can be challenged in several circumstances: if the person did not know the taxes were unpaid, if they were deceived by the company's bookkeeper or CFO, or if they took affirmative steps to address the delinquency as soon as they became aware of it. Good-faith reliance on a professional who assured the person that deposits were being made can, in some cases, negate willfulness.

EDD Employment Tax Audits

The California Employment Development Department conducts its own employment tax audits independently of the IRS, and EDD audits have their own distinct features that California employers need to understand.

EDD audits focus on three issues: whether all wages are being properly reported, whether withholding is being calculated and deposited correctly, and — most significantly — whether workers classified as independent contractors should be reclassified as employees. EDD has been one of the more aggressive state agencies in contractor reclassification, and the exposure in a reclassification audit is significant: back employment taxes for every reclassified worker, for every open audit year (typically three years, extendable to eight in fraud cases), plus a 10% negligence penalty on underpaid taxes and a 25% fraud penalty if EDD believes the misclassification was intentional.

AB5 and Independent Contractor Risk

California's AB5 (effective January 1, 2020) codified the "ABC test" for independent contractor classification, making it substantially harder to classify workers as contractors in California. Under AB5, a worker is presumed to be an employee unless the hiring entity can demonstrate all three prongs: (A) the worker is free from the control and direction of the hiring entity; (B) the worker performs work outside the usual course of the hiring entity's business; and (C) the worker is customarily engaged in an independently established trade. Prong B in particular has been the source of significant dispute — businesses whose core service involves the work performed by the contractors are at the highest risk.

EDD auditors are aware of AB5 and apply the ABC test in audits of businesses with independent contractor workforces. If you have a significant 1099 workforce and have not had your classification methodology reviewed since 2020, an EDD audit is a real risk.

How California EDD Audits Differ from IRS Audits

EDD audits are administrative proceedings conducted by EDD examiners, with appeals to the California Unemployment Insurance Appeals Board (CUIAB) and ultimately to California Superior Court. They are not coordinated with the IRS by default, but EDD and the IRS do share information — an EDD reclassification finding can trigger an IRS reclassification audit for federal employment tax purposes, compounding the liability. We handle both agencies in the same matter.

The IRS Collection Machine

When payroll taxes go unpaid, the IRS collection process escalates in a predictable sequence. Understanding the sequence matters for knowing where you have leverage.

The IRS begins with automated notices — a CP501, CP503, CP504 (Notice of Intent to Levy). At the CP504 stage, the IRS has the legal authority to levy your bank accounts and receivables. A Revenue Officer is typically assigned for larger balances or repeat delinquencies. Revenue Officers have broad authority: they can issue levies, file tax liens (Notice of Federal Tax Lien, NFTL), and, in cases involving deliberate non-payment, refer the matter to IRS Criminal Investigation.

Tax liens under IRC § 6321 attach to all property and rights to property. Once a lien is filed, it becomes public record and can affect your ability to sell property, secure financing, or maintain business relationships. Payroll tax liens are particularly damaging because they are often filed on both the company and on individual responsible persons simultaneously — meaning the lien follows you personally even if the company closes.

Criminal referral happens in cases where the IRS can demonstrate intentional evasion — not just failure to pay, but affirmative conduct to conceal the liability or to pocket withheld funds. For most businesses with a cash flow problem, criminal exposure is not the immediate concern, but it needs to be evaluated early in any representation.

Penalty Abatement

Payroll tax penalties — failure-to-file, failure-to-deposit, and in some cases the trust fund recovery penalty itself — can be reduced or eliminated through formal abatement requests.

First-Time Abatement (FTA) is available under IRS Policy Statement 20-1 for taxpayers with a clean compliance history for the prior three years. FTA applies to failure-to-file and failure-to-pay penalties — it does not apply to the TFRP directly, but it can reduce the underlying § 6656 failure-to-deposit penalty that contributes to the total balance. FTA is frequently overlooked and is one of the most reliable abatement mechanisms when the client qualifies.

Reasonable cause abatement under IRC § 6724 and the general reasonable cause standard is available when the taxpayer can demonstrate that the failure to file or deposit resulted from circumstances beyond their control — a serious illness, a natural disaster, the death or incapacity of a key employee responsible for payroll, or reliance on professional advice that turned out to be incorrect. The IRS's standards for what constitutes reasonable cause are specific and the supporting documentation needs to be thorough.

Representative Matters

Each matter is different, and past results do not guarantee any particular outcome. The following examples are representative of the types of payroll tax cases we handle.

Related Services

• IRS Defense — Full spectrum federal tax defense
• ERC Audit Defense — Payroll tax crossover for ERC claims
• Tax Lien Defense — Federal and California tax liens
• Trust Fund Recovery Penalty — Detailed TFRP defense guide
• San Diego Tax Attorney — Local representation
• EDD audit attorney