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

• Publication year: 1997
• Pages: 117
• Citation: Vol. 26 No. 10 Pg. 117

26 Colo.Law. 117 Colorado Lawyer 1997.

1997, October, Pg. 117. When the IRS Wants Your Client to Pay Trust Fund Taxes-Part II

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117

Vol. 26, No. 10, Pg. 117

The Colorado Lawyer
October 1997
Vol. 26, No. 10 [Page 117]

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

Part I of this three-part article, published in the September issue,1 discussed the basics of the Internal Revenue Code ("Code") § 6672 penalty. Section 6672 empowers the IRS to collect trust fund taxes from the personal assets of certain individuals, even though they may otherwise enjoy limited personal liability as a result of the form under which they conduct business. The penalty is used principally as a collection tool and is imposed against certain "responsible persons" within businesses who "willfully fail to collect, truthfully account for, and pay over ['trust fund' taxes]."2 Part I introduced several defense strategies associated with the definitions of responsible person and willfulness

This Part II discusses the IRS's procedures employed in asserting the penalty and procedures that taxpayers can use in defending the penalty. Part III, to be published in the November issue, discusses how to gather the facts of a client's case and strategies available to lessen the penalty's sting

Overview

Code § 6672 cases are usually investigated and proposed by Revenue Officers ("ROs") in the IRS Collection Division. To a large extent, the RO will follow standard IRS procedures, including some combination of the following: (1) proposal of the penalty by the Collection Division, (2) assessment of the tax by the IRS, (3) payment of the tax by the individual or dealing with IRS collection procedures, (4) filing appropriate documents to seek review of the matter by the District Office and, if necessary, the Appeals Division and (5) filing a refund action in federal court.

Proposal of the Penalty

The IRS identifies late, or seriously deficient, employers by means of an IRS program called "FTD (Federal Tax Deposit) Alert."3 FTD Alerts are issued ten to twelve weeks into each calendar quarter by the Martinsberg Computing Center and sent to each District office for follow-up. After receipt, the IRS District Office will forward an "FTD Alert Notice" to the employer. If the explanation received from the employer is not acceptable, an RO will be assigned the case to conduct a "full compliance check."

Once assigned, the RO normally will try to bring the employer into full compliance with all past and current filing and payment requirements. If the employer is unable to comply, the RO has several options, including initiating a trust fund recovery penalty ("TFRP") investigation.4

Because a TFRP investigation is likely to result in personal liability to the officers who control the finances of the business, it is best for all concerned to stop a TFRP investigation at its origination. If the business is still operating, the most effective way to eliminate a TFRP investigation is for the business and potential § 6672 targets to marshal their resources and make a voluntary payment to the IRS. These payments must be remitted with the explicit designation that they be applied against the outstanding delinquent trust fund taxes.5

Alternatively, if full payment of the trust fund taxes cannot be arranged, and if the business appears to possess a realistic possibility of paying all the trust fund portion of the taxes over a relatively short period of time, a full investigation may be mooted through negotiation of an "in business" installment agreement with the RO.6

If the RO decides to proceed with a TFRP investigation,7 he or she will examine the tax returns, bank records and signature cards, articles of incorporation and bylaws, canceled checks, corporate minutes, resolutions, and the like. If necessary, the RO may utilize the IRS's administrative summons power to obtain this information.8

The RO also will attempt to personally interview all individuals who might have knowledge of (1) how decisions were made within the organization, (2) who had decision-making authority to control which creditors were paid, and (3) who was familiar with the company's financial condition and the status of outstanding tax debts. In conducting interviews, the RO will question potential targets by completing a Form 4180, "Report of Interview with Individual Relative to 100-Percent Penalty Recommendation." For non-targets, the RO will either interview the person and take notes or send the witness a Form 4181, "Questionnaire Relating to Federal Trust Fund Tax Matters of Employer," and ask the witness to complete and return it.

If a potential target retains counsel prior to an RO interview, counsel must decide whether to permit the interview and, if so, under what circumstances. Only in rare circumstances should the attorney allow a target to be interviewed, as doing so generally benefits only the IRS. Counsel can provide whatever information is sought by the IRS without subjecting the client to the unnerving experience of being interviewed. Although the Manual states the RO should not mail a Form 4180 to a potential target who refuses to be interviewed in person,9 nothing precludes counsel and the client from completing a form on their own and mailing it to the RO in substitution of an interview. In this manner, the taxpayer will have provided the IRS with the information it has requested and, by so doing, reduce the likelihood of a summons being issued.

If an interview is permitted, it is probably best if only counsel attends.10 The attorney can bring a Form 4180 to the interview, completed in advance by the client...