Your business owes the IRS employment taxes, and an IRS Revenue Officer has just called you and requested that you come down to his office for a meeting to discuss the debt.
Chances are, the meeting will include the IRS agent requesting to interview you using IRS Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty.
You do not know it, but the real focus of the meeting is you, not the business.
That’s right, the IRS can collect an unpaid employment tax liability from not just your business, but you, too.
The IRS calls this a trust fund recovery penalty interview, and it is designed to sniff out who in the business made the decisions not to pay employee withholding taxes to the IRS.
A trust fund recovery penalty interview and investigation permits the IRS to collect the unpaid taxes not only from the business, but from the assets of the individuals involved in the finances of the business. This is because the employment taxes belonged to the employees, and were to be held in trust by the business for payment to the IRS.
The culprits the IRS is looking for include owners, shareholders, officers, and anyone who signed, or could have signed, bank checks and paid creditors (which often includes employees of the business).
You got it – the IRS takes employment taxes debts seriously.
Sometimes innocent people get caught up in the mess. For example, a clerical employee who signs checks as an accounting function but lacks control over company finances could be targeted simply by virtue of having his name on the bank checks. In other words, the IRS casts a wide net when it comes to sweeping people into their trust fund net.
But it may be possible for you to avoid the whole mess, stop the trust fund investigation, and not have to succumb to an uncomfortable interview with an IRS agent.
Here are four solutions to putting an end to an IRS trust fund recovery penalty investigation and not having to submit to an interview:
- Agree to the trust fund recovery penalty and cancel the interview. The purpose of the IRS investigation is to determine if you (and others) were decision-makers in the business and controlled financial decisions to not pay the IRS. Let’s say we determine that, ultimately, your acts in failing to see to it that the taxes were paid will make you personally liable for the debt. We would call the IRS agent, notify him that we are in agreement to the trust fund recovery penalty, and request that he send us IRS Form 2751, Proposed Assessment of Trust Fund Recovery Penalty. If we sign the Form 2751, the liability is agreed to, and the IRS Revenue Officer has discretion to end your investigation; no interview, no stress.
- Direct debit streamlined in-business installment agreement. Internal IRS guidelines permit a Revenue Officer to cancel his trust fund investigation if the employment tax liability is under $25,000 and the business can pay it back in 24 months by direct debit out of its bank account. This is permitted under Internal Revenue Manual 184.108.40.206, which recognizes that smaller employment tax balances that can be quickly paid do not call for the extreme measures of a trust fund recovery penalty investigation. So if your business has a balance of $25,000 and under and can pay what it owes, you and others in the business have a way out of personal liability for the employment taxes.
- Uncollectibility. Even if you are liable for the trust fund recovery penalty, proving to the IRS that you could never pay it is a way to end their investigation. Specifically, Internal Revenue Manual 220.127.116.11 permits an IRS Revenue Officer to back off a trust fund investigation if there is no present or future collection potential from you personally. The IRS will require that you complete a financial statement on their Form 433A, and satisfy them that you cannot pay anything now, and that will never change. In practice, though, know IRS Revenue Officers can be tough on the interpreting the vague standard of whether the debt could ever be collected from you, and often assert the trust fund penalty regardless of your future collection potential.
- Statute of limitations on assessment of the trust fund recovery penalty. The good news is that the IRS does not have forever to do its trust fund investigation and interview you. Internal Revenue Code 6501(b)(2) gives the IRS three years to get its job done. The three years generally begins on April 15 of the year after the employment tax returns were due to be filed. In other words, if you are involved in a business with employment tax liabilities from 2011, and the returns were filed on time, the IRS’s time to complete its trust fund investigation against you would end on April 15, 2015. If the IRS contacts you after April 15, 2015 to conduct a trust fund interview on 2011 employment taxes, they could be out of time and barred by law from continuing their investigation and not be able to conduct the interview.
Additional defenses to the trust fund recovery penalty can be mounted on the basis of responsibility or willfulness.
To prevail on the responsibility defense, we would need to prove to the IRS that you did not have control over the company’s decision-making process and finances.
The willfulness defense involves a lack of knowledge about what’s happening in the business regarding the payment of the employment taxes. To win with a lack of willfulness, it is not enough to simply not have known. The standard includes proving you did not know and could not have known employment taxes were not being paid.
The IRS needs to have evidence of both responsibility and willfulness. In other words, you can be responsible and in control of the finances and still avoid a trust fund liability by using the willfulness defense.
The IRS tends to aggressively pursue collection of employment taxes and investigation of the trust fund recovery penalty. But there are ways to prevent the individuals that ran the business from enduring a trust fund investigation and stop an IRS interview. It is enough that the business is suffering under the weight of the tax debt; you could have defenses to avoid suffering financially along with it.