As mentioned throughout the book, in most 941 cases someone is going to be on the hook for the Trust Fund Recovery Penalty. The process and concepts revolving this penalty are extensive, so I wanted to dedicate an entire chapter on it.
Personal Assessment Overview
The employee portion of withheld social security, Medicare, and income taxes is the Trust Fund. The employer portion is what stays with the business. If the business goes out of business, that liability disappears, but the employee portion becomes an ongoing liability.
Responsible and Willful
The key to whether you will be assessed this penalty comes down to whether you were responsible and willful. Let us talk about both concepts:
Responsible – This could be an officer of a corporation, a partner or employee of a partnership, an accountant or payroll professional, a specific check signer, or any other person or entity that is responsible for collecting, accounting for, and paying trust fund taxes to the Treasury.
It really comes down to whocontrols the money, specifically in relation to payroll. Hiring a payroll company does not absolve that person of the responsibility; delegation does not remove responsibility.
Willful – This means voluntarily, consciously, and intentionally. Did they do it on purpose? A person that is willful is someone that knows the required actions of collecting, accounting for, and paying trust fund taxes to the Treasury.
Common mistakes from those willful are based around deciding which bills get paid. They may also be trying to save their job by not telling the business owner and stressing them out about the issues.
*Special Note: If a responsible person finds out about the willful persons actions and do not take immediate action, then they will become part of the willful category.
Both – For those responsible and willful persons, the Trust Fund Recovery Penalty will be imposed. If this is imposed upon you, the full weight of the IRS can pierce the corporate veil and touch you personally.
Form 4180 Interview
For those that are possibly responsible or willful, there will be a personal interview by the IRS. This interview is required by the IRM to determine who is going to be liable for this penalty.
The interview can occur over the phone or in person. Do not be afraid to request the interview over the phone since the Revenue Officer will likely prefer that option anyways.
I would recommend going through the entire Form 4180 ahead of the call. Think of it as an interview prep. Go through the questions and make sure you have your answers down pat. In fact, I would recommend filling out the form, so you have the answers to share on the phone. It will keep your information on point and will prevent you from rambling.
*Special Note: Do not answer any questions about roles and responsibilities when the revenue officer shows up in person.
*Special Note: You can refuse a non-scheduled site visit. You can ask for a proper site schedule.
*Special Note: Never sign Form 2751 accepting the assessment without a good reason. You are not required to and nor should you.
FORM 4180 – Section 1
Any open-ended questions on this form are traps; be careful. Be as brief as possible. Be truthful but be concise and do not leave room for them to ask follow-up questions.
There is a difference between telling them about your role, versus basically handing them a resume with a bullet point for every little detail and thing you touched there at the office.
FORM 4180 – Section 2
If you are making a responsible defense, the dates that you held the responsibilities should before or after the quarters in question for the 941.
Be aware that Question H is specifically asking who else they can go after.
FORM 4180 – Section 3
This form you can sign, just do not ever sign Form 2751 (waiver of your rights).
FORM 4180 – Section 4
This is another section where they are probing for people to throw under the bus. Please use caution with what you say here.
FORM 4180 – Section 5
Who got paid and when and who made that decision? Those are the questions being asked here.
Tip based on question 6, do not document any talks about this! They can subpoena records and get all this information, so I hope you do not have anything discussed. If so, be truthful. If not, do not document anything moving forward.
FORM 4180 – Section 6
After you finish up Section 6, use the additional notes at the end of the form for anything else you need to provide.
Defenses Against Personal Assessment
Silo everything. Break up responsible and willful. That is the easy answer. You cannot retroactively do anything (fraud) but moving forward you should structure your company to have one person that is responsible, and one person that is willful. Separate the duties of those officers to have a defense if it comes up again.
Do not play CFO
Do not prepare 941s
Do not prepare payroll
Do not be on the bank account as authorized check signer
Do not be the name on EFTPS
Do not have access to online banking
Do not be the person paying the bills
Do not be the person deciding which bills to pay
Do not be in the loop on financial matters
Do not interact with the IRS.
Just to be clear…
It is exceedingly rare to avoid personal assessment in small companies except in IBTF-E situations discussed earlier (and even then, it is mostly deferred). Therefore, if you have a chance to qualify for IBTF-E, it is a great option even if it is just deferred.
Single member LLC and single shareholder S-corps are going to get assessed, no questions.
Can you truly separate willful/responsible criteria in a business? Yes, but it takes careful advanced planning and cannot be retroactive (fraud).
I would like to specifically talk about Status 63. This may be an interesting option for you. Status 63 is when a person is personally assessed (TFRP) but the IRS does not take collection action. It has a suspension of collection activity against an individual who has been personally assessed. For this suspension to happen, an IBTF installment agreement needs to be in place with the business and the debt liability will be cash paid in full over the next few years.
If you can get that done, ask the RO if they can put this into Status 63. Status 63 is your friend. They will not give it to you by default, but if you have played nice and the business is doing its job to pay it back, the likely will put the suspension in place.
The best part about it is that there will not be any Notice for Federal Tax Liens put into effect for you personally. Although, you will not qualify if there are any other tax debts assessed against you, for example other 1040-individual debts. If that is the case, you will not qualify.
A Few Final TFRP Notes
Remember, the IRS must prove you both responsible and willful in the failure to make Federal Tax Deposits. If they cannot prove both parts, you will not be assessed the penalty.
Also, multiple people can be assessed, but the responsibility to pay back the trust fund portion is a joint and several liability with the business. Payments from any party reduces the liability of other parties. Even if the business closes, personal assessment stands (it is an entire separate case, debt, responsibility, resolution situation.)
You also should not get these two specific forms confused:
Form 2751 – Acceptance of TFRP assessment and waiver of Appeals rights as well as waive judicial review. Do not sign unless you have a good reason.
Form 2750 – Waiver of ASED. This is a good form to use as a bargaining chip.
Should you get assessed the TFRP, you will have the option to take your case to Appeals. You need to do this within 60 days of receiving Letter 1153 (the letter that personally assesses you the tax).
Remember, Appeals is your best friend. However, Appeals cannot determine the assessment itself, but they can make an independent determination about willfulness and responsibility. They can review a Revenue Officer’s decision on that front.
The other way to get into Appeals is if you get Notice CP 15B. If you get this notice, pay one quarters worth of the Trust Fund debt and file Form 843 with collections. They will never want to agree to this Form, which means that they will send you a denial with Appeals rights for 30 days after that denial. From there, you can have the exact conversation you wanted pre-assessment.
Letter 1153 Appeal Process
If the amount in question is $25,000 or less, you have a small case request. If any single tax period is more than $25,000, you must have a Formal Written Protest. The only difference is that a Formal Written Protest includes a signature that is under penalty of perjury.
In both cases, you need to send a letter to the person proposing the assessment against you (Revenue Officer), who will then you are your appeal to the Appeals division.
There is no formal form for filing this type of Appeal, which is why you need to send a letter. Include:
Your information (name, address, and social security number)
A copy of the Letter 1153 you were sent
A statement specifically saying that you want an “Appeals hearing”.
A list of the tax periods you are appealing as a part of this process.
Provide a statement explaining why you disagree with the assessment, that you are not responsible or willful (or both) and provide ample reasoning.
From there, you should include a last paragraph if you are doing a Formal Written Protest that should state:
“Under penalties of perjury, I declare that I have examined the facts presented in this statement and any accompanying information and to the best of my knowledge and belief, they are trust, correct, and complete”.
Within those 60 days, you should be building your case and cleaning up any final messes. Provide citation to relevant statues, procedures, and/or case law to help back you up for the Appeals hearing.
Send two complete copies of your letter and documentation to Appeals.