IRS Lien

A good business can also fall into hard times. Often, when a corporation gets into financial trouble the IRS is made an unwilling lender to the corporation. This happens when payroll taxes collected from employees or excise taxes collected from customers is not sent to IRS, but is kept for current cash flow. The owner may think of paying it back once things settle down, but it may never get paid or IRS may move in quickly to collect. This could 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 system at the bank or electronically via the Electronic Federal Tax Payment System. IRS monitors these payments and if they stop coming, it can generate an Federal Tax Deposit Alert for a local IRS Revenue Officer. That Revenue Officer will then contact the business to find out why the payments have fallen behind. If no valid reason is found or no workout can be negotiated, he or she may conduct a TFRP investigation.

Before the TFRP can be assessed, interviews are usually conducted with the President and other corporate officers as well as the Board of Directors. This is done using the Form 4180 and 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 an Attorney. Based on the interviews, the Revenue Officer will decide whom he will investigate further. In addition to the 4180; bank records, corporate minutes, and Secretary of State data on the corporation will be examined.

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

If you are called upon to submit to a 4180 Interview, get professional representation before you meet with the IRS. Each party being interviewed should have their own representative to avoid any conflict of interest. You do not 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 Revenue Officer. You must be very truthful, but you do not have to elaborate beyond what is required on the form.

Although the IRS hates it, you do have the right to make a dedicated payment to the Trust Fund Tax to preclude the TFRP. If your corporation has little or no assets, paying the Trust Fund only 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 complicated and generally only applies to defunct corporations. It must be a truly legitimate transaction and fraud cannot be contemplated. Do not try it without professional tax help.