Bad things happen to good people sometimes. A good business can also fall on hard times. Often, when a corporation gets into financial trouble the IRS is made an unwilling lender. This happens when payroll taxes collected from employees or excise taxes collected from customers is not sent to IRS, but kept for current cash flow. The owner may "plan" to pay it back once "things get better," but it may never get paid or IRS may move in quickly to collect. This can lead to the assertion of the Trust Fund Recovery Penalty (TFRP) against responsible corporate officers.

Except for very small payrolls, employee withholding taxes are remitted through the Federal Tax Deposit (FTD) system at the bank or electronically via the Electronic Federal Tax Payment System (EFTPS). IRS monitors these payments and if they stop coming, it can generate an "FTD Alert" for a local IRS Revenue Officer (RO). That RO will then contact the business to find out why the payments have fallen behind. If no valid reason is found (no more employees) or no workout can be negotiated, he or she may conduct a TFRP investigation.

Before the TFRP can be assessed, interviews are normally conducted with the President and other corporate officers as well as the Board of Directors. This is done using the Form 4180. It is often called a "4180 Interview." The Revenue Officer will want to take the interview in person, but taxpayers do have a right to representation by a CPA, Enrolled Agent, or Attorney. Based on the interviews, the RO will decide whom he will investigate further. In addition to the 4180; bank records, corporate minutes, Secretary of State data on the corporation etc. will be examined.

Controlling shareholders who may not be an officer or director are potential targets of the TFRP if they exercised influence on what bills were paid etc. If you are an office manager or secretary, you may not necessarily be immune from the TFRP. The circumstances are important. The most important issues are knowledge, authority, and execution. In addition, state laws may be used by IRS when in their favor. In some states, directors of a corporation are expressly charged with insuring taxes are paid.

If you are called upon to submit to a 4180 Interview, get professional representation before you meet with IRS. Each party being interviewed should have their own representative to avoid a conflict of interest. You don't want to be the "fall guy" for your boss. Fill out a 4180 before you meet with IRS and stick to the facts when being interviewed by the RO. You must be truthful, but you do not have to elaborate beyond what is required on the form.

Although IRS hates it, you do have the right to make a dedicated payment to the Trust Fund Tax to preclude the TFRP. If your corp has little or no assets, paying the Trust Fund only (plus the liquidating value of assets) might result in a settlement for less than the total due from the corporation without having to do an Offer-in-Compromise. This is very tricky and generally only applies to defunct corporations. It must be a legitimate transaction and fraud cannot be contemplated. Don't try it without professional tax help! If you are in business, IRS will try and get full payment if possible from any and all legal sources. An Offer-in-Compromise for a going business is almost impossible under current IRS policy.

If the Trust Fund is not paid, each individual that the RO believes is a "responsible person" under the Internal Revenue Code will get a letter proposing the penalty and they will be given 30-60 days to respond. Those individuals must file a timely protest or the penalty will be assessed. Because of the negative impact of a Federal Tax Lien, it is very important to protest the TFRP in a timely manner if you believe that you can asset a solid defense. Once it is assessed, then collection of the unpaid trust fund tax can be made from personal assets, not just corporate assets. IRS can file a Federal Tax Lien and take enforced collection action on personal property and real estate belonging to a "responsible person."

Sometimes an RO is sloppy and just assesses the penalty against anyone he can make the slightest case upon. I have seen wives charged the TFRP who had nothing to do with the corporation, were not involved in management, did not sign checks etc. There is a good chance of winning an Appeal in that instance. If you are a secretary and did not have the independent authority to pay bills but did so only upon the direct order of the President or Controller, you may have a good defense. Each case is judged on the individual merits. Get a CPA, Enrolled Agent or Attorney with tax representation experience to help you sooner, rather than later. Do not hire some outfit you see on TV or be "sold" by a clever salesman. Insist on speaking with a licensed professional before you hire a firm to help you.

If you are charged with the TFRP and you know the assessment is valid, work with the IRS to get it paid. Do not delay or put your head in the sand. Look at securing loans or other means to pay IRS. Give the IRS all of the financial information they require when they ask for it in consultation with your tax professional. IRS considers payroll tax collection a top priority. More than ever before in recent memory, the possibility of criminal prosecution for payroll tax avoidance is possible. It is very rare, but the threat is real. Take payroll taxes very seriously.

IRS Circular 230 Disclosure: The discussion of U.S. federal tax matters contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding valid penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter[s] designed to avoid payment of taxes due the United States. No "covered opinion" under IRS Circular 230 is provided by virtue of this article.