In addition to holding a company liable for unpaid payroll taxes, the IRS also holds any person or persons they determine to have “willfully” chosen to not remit the payroll withholding amounts when due (see Trust Fund Recovery Penalty under the “Services” menu).
Determining Who is Responsible
In creating a pool of “suspects” the IRS usually begins with the owners of the company and the persons listed in the company’s bank signature card. That being said the IRS will continue to broaden their scope if they find others that were involved in the decision to no remit the payroll withholdings.
Once they compile a list they conduct interviews referred to as a 4180 interview (the IRS uses Form 4180 to record the interviewees responses). If the IRS determines a person was not responsible, they are personally off the hook for the Trust Fund portion right away.
If on the other hand the IRS determines a person to be responsible and assessed the Trust Fund portion in the form of a Civil Penalty. Once the determination has occurred, the responsible person has a limited amount of time to appeal the determination before it becomes final. Once it becomes final the responsible person is held personally liable. If this is the case there are alternative to addressing the Civil Penalty such as an installment agreement or offer in compromise.
The Tax Resolution Institute has been successful in limiting the amount of people held responsible stemming from 4180 interviews. In addition, if it is obvious you are going to be considered responsible, we usually can get your company into an agreement and have the IRS leave you alone personally.
During the initial contact with the taxpayer the Revenue Officer will attempt to conduct interviews with all potentially responsible persons. The revenue officer should take the following actions during the interview:
- Provide Publication 1, Your Rights as a Taxpayer, and document the history that the publication was delivered;
- Explain the Trust Fund Recovery Penalty;
- Advise all potentially responsible persons, to the extent possible, that they may be held personally liable for the Trust Fund Recovery Penalty;
- Provide Notice 784, Could You Be Personally Liable for Certain Unpaid Federal Taxes?
- Advise the person(s) being interviewed of the proper actions to take to avoid such liability;
- Begin asking questions and gathering information and documents, such as bank statements and cancelled checks, in support of assertion of the penalty;
- Attempt to secure at least one Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Tax, from a potentially responsible person;
- Secure additional Forms 4180 from all potentially responsible personas to the extent possible;
- The Revenue Officer will not give or mail the form to the potentially responsible person(s) or representative for completion by that person. It will be completed in person or over the phone;
- The Revenue Officer will always request the presence of the potentially responsible person when conducting an interview with a representative having a Power of Attorney;
- A summons may be necessary to require the potentially responsible person’s presence at the interview;
- A statement can be updated at a later date with the changes, initiated by the Revenue Officer and the person interviewed.
Third Party Interviews and Third Party Contact Considerations
It may be necessary to contact a third party for the purpose of gathering information concerning other officers or employees.
The Revenue Officer will secure and include in the file documentation of sources of income and assets and all necessary supporting documents in order for the initiating revenue officer to make a recommendation for assertion or non-assertion of the Trust Fund Revenue Penalty, including non-assertion due to collectability.
Evidence That May Support Recommendations
In the majority of cases, the largest portion of evidence that is secured to support recommendations of Trust Fund Recovery Penalty is either corporate records or bank records.
Note: Determination of the amount of documentation required to support the recommendation to assert the penalty is done so on a case by case basis. There must be sufficient documentation in the file to support each recommendation for assertion. Bank records and copies of the applicable tax returns will be secured on almost every case. If they are not secured, the case file must be documented with the reason(s) why they were not secured and why they are not necessary to support the recommendation.
Corporate records that can be reviewed include:
- Articles of Incorporation
- Minute Books
- Forms 941 and 1120 or 1065
- Payroll records