The IRS uses Letter 1153 to propose assessment of the Trust Fund Recovery Penalty against Responsible Persons. When a business doesn't pay the employee withholding taxes, the IRS is empowered to collect from those persons who could have paid the tax. They always pursue those who had any signatory control over the business bank account. These "persons" are called Responsible Persons & the tax is called a Trust Fund Recovery Penalty.
Because the employees were given credit for the taxes (& FICA) never paid to the Government, the IRS feels the Responsible Persons have stolen the money from the USA.
If the business is a Corporation (S or C) the responsible persons are not personally liable for the business portion of the tax (1/2 of the FICA). But they are liable for the rest. For a Schedule C, self-employed (or single-member LLC) business the responsible persons are liable for the full tax.
Response to Letter 1153
You have 60 days to Appeal (within the IRS) the IRS determination before an assessment is made. After an assessment is made you can Appeal a Levy or Lien with a Collection Due Process Appeal where the underlying liability will be an issue.
However, the more traditional (& better) option is to pay all (or a portion) of the tax & file a claim for refund, Form 843. The IRS will ignore your claim but after 6 months you can sue the USA in US District Court. The US District Court is a better forum because the Court has Equitable powers over the IRS. The Court can fairly & independently review your case.
In any event, tax attorney guidance is critical. If you admit you are a responsible person it is futile to contest it. You can sign & agree to the liability with Form 2751. In this case, it is best to follow the Collection Prep Steps for additional information, forms & instructions.
But, if you do not agree you are liable for this tax, you can Appeal within the IRS and/or file a claim for refund & sue the USA in US District Court. If the case is decided in Court no further IRS Appeals are possible.
Please review the Business Tax Prep Steps for more detailed information, forms & instructions to fight the IRS!