When the Irs Wants Your Client to Pay Trust Fund Taxes-part Iii

• Publication year: 1997
• Pages: 105

26 Colo.Law. 105 Colorado Lawyer 1997.

1997, November, Pg. 105. When the IRS Wants Your Client to Pay Trust Fund Taxes-Part III

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105

Vol.26, No. 11, Pg. 105

The Colorado Lawyer
November 1997
Vol. 26, No. 11 [Page 105]

Specialty Law Columns
Tax Tips
When the IRS Wants Your Client to Pay Trust Fund Taxes--Part III
by Jerome Borison, Steven R. Anderson
C 1997 Jerome Borison and Steven R. Anderson

This is the final segment of a three-part article addressing the "trust fund recovery penalty," formerly known as the 100 percent penalty. Part I, published in the September issue,1 discussed the elements of the penalty and the potential defenses available with respect to the penalty Part II, printed in the October issue,2 explored the procedures employed by the IRS in asserting, and taxpayers in defending, the penalty. This Part III examines factual development and analysis in trust fund recovery cases

Gather and Evaluate The Evidence

As with other time sensitive matters, counsel should schedule an initial conference with the potential client as soon as possible. The individual should bring all relevant documents and papers in his or her possession, including:3

correspondence, papers, business cards and forms received from the IRS

Forms 941 (or other similar returns) of the employer;

FTDs (Federal Tax Deposits), including canceled checks or copies thereof;

notes kept by the client (or others) regarding events that have transpired, conversations that have taken place, IRS interviews that have occurred, and the like;

books and records of the employer, including ledgers, journals, bank records and statements, bank signatory cards and the like;

the articles of incorporation and bylaws of the business;

minutes of the meetings of the board of directors and shareholders, especially those that refer to the authority and duties of the officers and directors, when such people were appointed or resigned, and any indications that funds were used for purposes other than the payment of taxes; and

anything else the client feels may be important or relevant.

At the outset, counsel and the potential client should agree on the scope and fact of representation.4 The most important item in this agreement is whether the individual has the authority to have counsel represent the business in addition to the targeted individual.5 Once counsel is retained and has filed the Form 2848, the IRS should contact the taxpayer only through counsel. Typically, these authors instruct the client to have no further discussion or communication with the IRS without counsel present.

Next, counsel should review and evaluate the facts, evidence, and information within the possession of the client. Counsel should advise the client regarding the strengths and weaknesses of his or her case, what possible defenses may exist based on the information presently available, what procedures lie ahead, how long they will take, what strategies may be employable, and how much representation will cost to fight the government. Counsel also should explain that this advice is based only on the information presently available, and that advice and strategy may change dramatically as counsel learns more. Unquestionably, counsel should interview the client after the initial conference to gain additional information.

The investigation will predictably point counsel in the direction of the IRS and third parties. Obtaining information from the IRS in § 6672 cases is complicated by the fact that there are normally multiple taxpayers involved--several potential targets as well as the business--each interested in knowing what the IRS's records indicate as to the other, but each entitled to protection from unauthorized disclosure under § 6103. For example, unless an individual is, inter alia, a principal officer of a corporation or at least a 1 percent shareholder, the individual or his or her representative will be denied most of the tax return information of the business.

The information/evidence obtainable from the IRS, subject to appropriate redaction to preserve the privacy of others, particularly targets, includes:6

Client Records: tax returns; transcripts of account; statements given, including those on Form 4180, and memoranda and notes of the interview; documents signed, such as Forms 2750, 2751 or 433; recommendations regarding assessment of the penalty, such as Forms 4183, 2749, Letter 1153 (DO) (the "sixty-day letter"), and transmittal sheets; protests and any other correspondence between the client and the IRS, including the revenue officer's memorandum in response to the protest and the Appeals Office transmittal memorandum and supporting statement (Form 5402); and the IRS's investigative history.

Business Records: If the individual is entitled to the records of the business, most IRS records are available. If not, only the payroll tax returns (Form 941) for the quarters for the specific periods the person is subject to the penalty are available.

Third Party Information: Copies of interviews (Form 44180 or 4181); what collection activity is being pursued by the IRS against others assessed the penalty.7

During the administrative life of the controversy, information from third parties may be difficult to obtain, as such persons may be targets themselves or have divided loyalties. If counsel discovers that other individuals have been interviewed by the Internal Revenue Service, counsel should attempt to speak to them to determine the information conveyed to the IRS. If a third person does not care to provide testimony, there is nothing counsel can do during the administrative phase to compel it. Counsel can commence discovery only when and if the matter reaches formal litigation.

Counsel should carefully review the basis of the government's case. Typically, the authors discover several particularly fruitful areas to examine. If the penalty is assessed as a result of taxes that were never withheld due to an alleged misclassification of employees as independent contractors, counsel should determine (1) if the business can defend itself on the classification issue directly, and, if not, (2) if the reclassified workers paid the taxes reflected on their Forms 1040.8 In addition, the failure to collect taxes due to an honest belief that the workers were properly...