IRS TRUST FUND RECOVERY PENALTY – AN OVERVIEW OF IRS INTERVIEW FORM 4180
AND THE INVESTIGATIVE PROCESS IN DETERMINING YOUR PERSONAL LIABILITY.
following summarizes guidelines which Revenue Officers and
Managers are to follow in targeting potentially responsible persons. (The
source is the Internal Revenue Manual ).
Both Civil and Criminal liability exposure exists. For discussion
about the criminal liability exposure, read
TRUST FUND RECOVERY PENALTY – AN ALTERNATIVE COLLECTION TOOL:
Trust Fund Recovery Penalty is based upon IRC section 6672 and serves as
an alternative means for the IRS to collect unpaid trust fund taxes when
the taxes are not fully collectible from the business that failed to pay
the withheld taxes. (IRM
IRS uses form 4180 (a
copy is here
) as part of the procedures for investigation, recommendation and approval
of the Trust Fund Recovery Penalty against individuals who are potentially
responsible for the non-payment of the business trust fund taxes.
INITIAL CONTACT WITH POTENTIALLY RESPONSIBLE PERSONS:
the initial contact with the taxpayer, the revenue office will attempt to
conduct interviews with potentially responsible persons. The revenue
officer is instructed to secure at least one form 4180, Report of
Interview with Individual Relative to the Trust Fund Recovery Penalty or
Personal Liability for Excise Taxes, from a potentially responsible person
(See IRM 188.8.131.52.4, Form 4180, and IRM 184.108.40.206.7, Evidence
That May Support Recommendations). Of course, the revenue office is
instructed to secure additional Forms 4180 from all potentially
responsible persons to the extent possible.
IRS INTERVIEW FORM 4180 - INTERVIEW TO BE IN PERSON OR OVER THE PHONE:
the interview, if the taxpayer states that he or she wishes to consult
with an authorized representative, the IRS employee is to suspend the
interview to permit such consultation.
form to be used for conducting the Trust Fund Recovery Penalty is Form
4180, and it is intended to used as a record of a PERSONAL interview to
be completed in person or over the phone (IRM220.127.116.11.4).
The purpose of the personal
interview and the completion of Form 4180 is to secure “direct, detailed
information regarding the individual’s or other persons involvement in
the business in order to determine if he or she meets the criteria for
responsibility and willfulness.” The questions on the form are a guide,
and supplemental questions may be asked.
IRS employees are instructed NOT to give out or mail Form 4180 for
completion or review prior to the interview.
Imagine going into an interview,
not even knowing what the questions are going to be? That
is only compounded by the fact that the targeted taxpayer doesn’t fully
appreciate the legal significance of the questions, and may feel
“pressure” to just go along with the
IRS representative in hopes that things will work out for the best.
One must realized that many taxpayer’s are in the position to begin with
because they had “false optimism” (e.g., similar to the view that -
business cash flow would improve). That is why, a taxpayer must be
represented by legal counsel. Also, the revenue office is instructed to
reference form 433B, Collection Information Statement for Businesses, for
information relative to the investigation.
1 of Form 4180 incorporates the core willfulness and responsibility
questions to support finding of liability.
EVIDENCE TO SUPPORT PERSONAL LIABILITY IRC SECTION 6672:
in the majority of cases, the IRM advises that the core evidence necessary
to support a Trust Fund Recovery Penalty recommendation will be:
Form 4180 interviews
Articles of Incorporation
Bank signature cards or electronic PINs/Passwords assignment
Copies of a sampling of cancelled checks demonstrating payment to
other creditors in
preference to the
If the taxpayer predominately uses electronic banking, bank
payments in preference to the government.
including bank records, will be requested from the business entity
whenever possible. If the business entity does not provide the requested
records by the deadline provided, a summons will be served on either the
business entity, the bank, or both, to secure the required documents (See
IRM 25.5 , Summons, and IRM 18.104.22.168, Third-Party Contact Requirements of
IRC § 7602(c), for summons procedures).
DOCUMENTATION, BUSINESS RECORDS, BANK RECORDS:
case factors will influence the amount of additional documentation needed
to support the TFRP determination. The revenue officer must exercise
judgment to determine if documentation beyond the core items is needed
prior to submitting the TFRP recommendation for managerial approval.
( IRM 22.214.171.124.7)
Revenue Officer is instructed to exercise judgment in determining if
documentary evidence beyond the core items is necessary to support a TFRP
assertion. Additional business
records that may be reviewed include:
Partnership Agreements; or other documents establishing/forming the
Forms 941, Employer's Quarterly Federal Tax Return; 1120, U.S.
Corporate Income Tax
Return; 1065, U.S. Return
of Partnership Income; or, 1040, U.S. Individual Income Tax
Return (for disregarded
business records may be reviewed to determine:
Duties (and changes to duties) of officers, directors, etc.
Appointments and resignations of officers, directors, etc.
Responsibilities of individuals to file and pay tax returns.
Issuance of stock to officers, directors, etc.
Assets transferred to officers, directors, etc.
Loans made to officers, directors, etc.
Unreported payroll and other taxes.
Diversion of funds.
Borrowing of funds not used to pay taxes.
Responsible parties within a Payroll Service Provider (PSP).
Responsible parties within a Professional Employer Organization (PEO).
bank records that may be reviewed include:
Correspondence to the bank relative to changes affecting the
signature cards or PIN
Loan applications and records of loans.
Any other records that may be relevant to determining which
individuals were involved
in the financial affairs
of the business.
bank records can be reviewed to determine:
Authority of persons to sign checks and deposit funds.
Authority of persons to obligate the business by borrowing.
Diversion of funds to officers, members, etc.
Deposits and withdrawals of alleged loans to business by officers,
Excessive salaries, expenses, etc.
Payment of other obligations.
Deposit records for monies received for sale of assets.
Deposit records of payments for stock, membership, or other
ownership rights in the
Payments to third-party payers.
Any other relevant records.
OF ALL FORMS 4180 AND DOCUMENTATION IN CASE FILE:
Forms 4180, and documentation
in the case file, are to be reviewed in order to make a determination
regarding responsibility (IRM 126.96.36.199.1, (Establishing Responsibility) and
willfulness (IRM 188.8.131.52.2, Establishing Willfulness) for each potentially
the Interview Forms 4180 are a part of the process and documentation
reviewed to make a determination as to both Responsibility and Willfulness
for each potentially responsible person.
4180 IS GEARED SPECIFICALLY TO THE ELEMENTS OF LIABILITY (WILLFULNESS AND
questions on Form 4180 are
geared directly to these vital elements of Responsibility and Willfulness.
For any targeted individual to attend an IRS interview without legal
counsel, is a big mistake. You
simply are not aware of the significant civil and potential criminal
aspects of this process. Moreover, the Interview form 4180 is not the
“end” of the investigation. Other documents and facts will be
reviewed. Accordingly, it
would be a mistake to start making statements of “fact”
without having reviewed the factual background of
a case. Taxpayers may have
forgotten about facts and circumstances.
are some of the questions on Form 4180:
you - “Determine
financial policy for the business?”
you - “Direct or
authorize payments of bills/creditors?”
you - “Prepare,
review, sign or authorize transmit payroll tax returns?”
you - “Have knowledge
withheld taxes were not paid?”
you - “Authorize
or make federal tax deposits?”
you - “Authorize
the assignment of any EFTPS or electronic banking PINS/passwords?”
is easy to correlate the above questions to those factors necessary to
establish willfulness and responsibility, as set forth below. But
note, at least some of the
questions are compound questions and a “Yes” to one part may indicate
liability, when such is not the case. Thus,
“yes” or “no” is not appropriate.
it is common for taxpayer’s to use terms when they do not appreciate the
actual meaning or significance. For example, assume that you are in the
accounting department and receive instructions from the Chief
Financial Officer telling you to instruct the secretary to
mail out specific bill payments to certain creditors only and not pay
others. Have you “authorized
payments”? Under IRS
pressure, you might answer “yes”, after all, you told her what bills
to pay, and you were her “boss”. Also,
the Secretary is going to advise the IRS that you “authorized”
payments because you are the one that told her what to do, and she dealt
only with you on a day to day basis. She “assumed” you were the guy in
charge! However, your
actions were in fact were “ministerial”.
You were a middle man
without any actual authority. Further,
“yes” to the question under pressure by the Revenue Officer
because the list of “approved payments” that you gave the secretary had
your initials on it.
must recognize that in the real world, many
times the Revenue Officer has already made up his or her mind as to who is
“liable” before the
investigation is done. Further,
the case may have been handed over to the current Revenue Officer from a
prior person working the case and the “administrative position”
(verbal and unwritten) follows the case.
The Revenue Officer thus pushes for the result they want, even when
they are wrong as a matter of law.
sets forth the following to establish willfulness:
Willful means intentional, deliberate, voluntary, reckless,
knowing, as opposed to accidental. No evil intent or bad motive is
To show willfulness, the government generally must demonstrate that
a responsible person was aware, or should have been aware, of the
outstanding taxes and either intentionally disregarded the law or was
plainly indifferent to its requirements. A responsible person's failure to
investigate or correct mismanagement after being notified that withholding
taxes have not been paid satisfies the TFRP "willfulness"
element. See IRM 184.108.40.206.3,
IRS sets forth the following as to establishing Responsibility
Responsibility is a matter of status, duty, and authority.
A determination of responsibility is dependent on the facts and
circumstances of each case.
Potential responsible persons include:
Officer or employee of a corporation
Partner or employee of a partnership
Corporate director or shareholder
Employee of a sole proprietorship
Limited liability company (LLC) member, manager or employee
Other person or entity outside the delinquent business organization
Payroll Service Provider (PSP)
Responsible parties within a PSP
Professional Employer Organization (PEO)
Responsible parties within a PEO
Responsible parties within the common law employer (client of PSP/PEO)
Business entities (including corporations, S corporations, LLC,
etc.) that are
determined to be the
collection agency in the case of certain collected excise taxes
A responsible person has:
Duty to perform
Power to direct the act of collecting trust fund taxes
Accountability for and authority to pay trust fund taxes
Authority to determine which creditors will or will not be paid
To determine whether a person has the status, duty and authority to
ensure that the trust fund taxes are paid, consider the duties of the
officers as set forth in the corporate by-laws as well as the ability of
the individual(s) to sign checks. In addition, determine the identity of
the individuals who:
Are officers, directors, or shareholders of the corporation
Hire and fire employees
Exercise authority to determine which creditors to pay
Sign and file the excise tax or employment tax returns, such as
Quarterly Federal Tax Return
Control the corporation’s voting stock
Make federal tax deposits
The TFRP is available and
may be appropriately asserted when the taxpayer is organized as a Limited
Liability Company (LLC). The need for a TFRP investigation is based on how
the LLC is classified for tax purposes and when the liability accrued. See
IRM 220.127.116.11.5, Trust Fund Recovery Penalty, for additional information on
LLCs. , etc … .
OF RESPONSIBLITY (IRM 18.104.22.168.1.1) (04-13-2006)
The full scope of authority and responsibility is contingent upon
whether the person had the ability to exercise independent judgment with
respect to the financial affairs of the business.
If a person is an officer or owns stock in the corporation, this
cannot be the sole basis for a responsibility determination.
If a person has the authority to sign checks, the exercise of that
authority does not, in and of itself, establish responsibility.
The IRM acknowledges that signatory authority may be merely a
Persons with ultimate authority over financial affairs may
generally not avoid responsibility by delegating that authority to someone
else. If a potentially responsible person asserts that the duty to pay
taxes or otherwise handle the financial affairs of the business was
delegated to an employee:
Evaluate the facts and circumstances of the case
Determine whether the delegation rendered the person (delegator)
powerless to disburse funds or dictate fiscal policy . The IRM also
advises that - Delegation may be relevant when determining willfulness.
Persons serving as volunteers solely in an honorary capacity as
directors and trustees of tax exempt organizations will generally not be
considered responsible persons unless they participated in the day-to-day
or financial operations of the organization and had actual knowledge of
the failure to withhold or pay over the trust fund taxes. This does not
apply if it would result in there being no person responsible for the TFRP.
Refer to IRC 6672(e).
MINISTERIAL ACTS VS.
SIGNIFICANT CONTROL 22.214.171.124.1.2
IRM 126.96.36.199.3, Policy Statement 5-14 (Formerly P-5-60), states
individuals performing ministerial acts without exercising independent
judgment will not be deemed responsible. In general, non-owner employees
who act solely under the dominion and control of others, and who are not
in a position to make independent decisions on behalf of the business
entity, will not be assessed the TFRP. Non-owner employees are those who
do not own any stock, interest, or other entrepreneurial stake in the
company that employs them.
Ministerial acts are performed under the supervision of someone
else and do not require independent judgment or decision-making ability.
bookkeeper of a company is not an owner and is not related to an owner.
She has check signing authority and pays all of the bills the treasurer
gives her. She is not permitted to pay any other bills, and when there are
not sufficient funds in the bank account to pay all of the bills, she must
ask the treasurer which bills to pay. The bookkeeper is performing a
ministerial act and should generally not be held responsible for the TFRP.
A person is "responsible" for purposes of the TFRP if
that person has "significant control" over the company's
finances. "Significant control" means more than having the mere
mechanical duty of signing checks or preparing tax returns or having a
title that appears to have authority. However, a responsible person need
not have the final word in the company regarding the payment of creditors.
Officers and higher level employees of a company who are non-owners may
still be required to sacrifice their jobs (i.e., quit) to avoid being
responsible for the TFRP, rather than obey the orders of an owner to pay
other creditors but not to pay current federal trust fund taxes as they
become due. See Brounstein v. United States, 979 F.2d 952, 956 (3rd Cir.
A non-owner employee is generally not a "responsible
person" if the employee's function was solely to pay the bills as
directed by a superior, rather than to determine which creditors would or
would not be paid. However, if a non-owner employee, such as an officer,
has significant control over making the company's other financial
decisions about who to pay or has the ability to obtain financing for the
company, then such an employee cannot avoid being responsible for the TFRP
by merely showing that an owner or a lender limited his discretion on the
specific matter of paying taxes that the company owed. See the examples
non-owner employee works as a clerical secretary in the office. She signs
checks and tax returns at the direction of and for the convenience of the
owner or a supervisor who is a non-owner. She is directed to pay other
vendors, even though payroll taxes are unpaid. The secretary is not a
responsible person for the TFRP because she works under the dominion and
control of the owner or of a supervisor who is a non-owner and she is not
permitted to exercise independent judgment.
long-time controller of a company was never a shareholder, director, or
officer of the company, but he was responsible for overseeing the finances
of the company, including the preparation of the payroll and filing the
company's federal employment tax returns. He had the authority to sign
checks in any amount and he dealt with the company's lender on a regular
basis when the company experienced financial troubles, though he did not
arrange or sign the lending agreement on the company's behalf. When the
lender directed the company to pursue an orderly liquidation of its
assets, the controller requested funds from the lender to make full
payroll and pay the taxes due on the remaining employees, but the lender
forwarded only enough funds for the company to make net payrolls. The
controller made out net payroll checks to the remaining employees and paid
none of the taxes due, rather than prorate the funds available to the
company between payroll and taxes. The controller could be a responsible
person for the TFRP. See Hochstein v. United States, 900 F.2d 543 (2nd
experienced businessman was never a shareholder, director, or officer of a
new company, but he served as the general manager of the new company
during a seven month period. As general manager, he signed most of the
company's checks to creditors, as well as signing net payroll checks to
employees, and there was no monetary limit placed on his check signing
authority. He told the bookkeeper which bills to pay. When the company was
experiencing cash flow problems, he spoke to one of the owners about the
company's delinquent payroll taxes. The owner told the general manager
that these unpaid taxes were none of the general manager's business and he
should not worry about paying the company's net payroll and missing its
tax payments. Both the general manager and the owner believed that the
general manager could not be held liable for the TFRP because he was not
an owner or officer of the company; the general manager turned down an
offer to become the company's president specifically because he was
worried about the company's tax situation. The general manager could be a
responsible person for the TFRP. See Gephardt v. United States , 818 F.2d
469 (6th Cir. 1987).
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|The above limited information is intended for
informational purposes only. If legal advice or other expert
assistance is required, the services of a competent professional should
be sought, and this general information should not be relied upon
without such professional assistance.