IRS Form 4180
Guide to the Trust Fund Recovery Penalty Interview
IRS Form 4180 – The Trust Fund Recovery Penalty Interview
Internal Revenue Service (IRS) officers typically conduct Form 4180 interviews to determine whether someone is responsible for an employer’s unpaid trust fund taxes. This interview can be daunting, as it may result in a severe trust fund recovery penalty against you personally.
In this post, we at The W Tax Group discuss how the trust fund recovery penalty works, who may be liable for it, and the Form 4180 interview process. We also outline your steps if the IRS has assessed this penalty against you.
The Trust Fund Recovery Penalty (TFRP) Explained
A trust fund recovery penalty (TFRP) is a penalty that the IRS assesses against a responsible person who failed to collect or pay trust fund taxes to the Treasury. The IRS assesses this penalty to:
- Encourage the timely payment of trust fund taxes
- Hold responsible persons liable for unremitted trust fund taxes
- Facilitate the collection of trust fund taxes from secondary resources
The IRS takes the collection and payment of trust fund taxes seriously, and the TFRP is among the agency’s most substantial penalties.
A business is responsible for withholding certain federal taxes from its employees’ paychecks. These taxes generally include federal income taxes and employees’ share of social security and Medicare taxes.
Then, the business must hold these taxes “in trust” until remitting them to the government via the Electronic Federal Tax Payment System (EFTPS). The collective term for these taxes on employees’ wages is “trust fund taxes.”
But what happens if a business fails to collect or remit the trust fund taxes it withheld from its employees’ paychecks?
For example, suppose Business Owner A withheld $2,500 in trust fund taxes from Employee B’s salary and failed to pay this money to the government. If B files their return, showing a refund balance of $2,500, the IRS must pay this refund even though it did not receive the withheld income tax during the tax year. Additionally, the employee gets credit for the SS and Medicare payments that were withheld from their paycheck, even though none of the money was actually collected. In other words, the government is footing the bill for taxes that the employer didn’t remit.
In the above example, the IRS views A’s failure to remit the tax withholdings as theft and will assess a trust fund recovery penalty against A.
The Trust Fund Recovery Penalty Amount
The TFRP amount equals 100% of the trust fund tax amount the responsible person should have collected or remitted under the Federal Insurance Contribution Act (FICA). In other words, if an employer fails to remit $1,000 in taxes, the TFRC will be $1,000, resulting in a trust fund recovery liability of $2,000.
Note that employers are also required to make matching payments for Social Security and Medicare contributions. These taxes are payroll taxes, but they aren’t considered trust fund taxes as they are not withheld from employees’ paychecks. Generally, the penalty will not include these amounts, but the employer may face other penalties for not paying these taxes.
Requirements for TFRP Liability – The “Responsible Person”
The IRS can assess a TFRP against any person whom it believes:
- Was responsible for collecting, accounting for, and depositing a trust fund tax amount and
- Willfully failed to collect, account for, and deposit the trust fund tax amount.
The IRS will only assess this penalty if it finds that responsibility and willfulness are present. These elements often get determined during the 4180 interview.
Responsibility
“Responsibility” is the requirement to collect, truthfully account for, and remit a trust fund tax. As a result, responsible persons are not always business owners, though they must have acted with some level of independent judgment. According to the IRS, potential targets whom it may consider responsible may include, among others:
- Officers
- Employees
- Members
- Corporate directors
- Board members of nonprofit organizations
- Third-party payers
- Payroll service providers
- Professional employer organizations
In some cases, the IRS can assess a TFRP against multiple individuals it deems responsible.
Note: Someone who acts mechanically at the direction of a superior does not exercise independent judgment, which means the responsibility requirement is not present.
Willfulness
Someone who had the responsibility to collect and remit trust fund taxes is only a “responsible person” for a TFRP if they:
- Knew or should have known of the outstanding trust fund taxes and
- Internationally disregarded or were indifferent to their obligation to remit the trust fund taxes.
The willfulness element can be present, even if the responsible person did not act with malicious intent, for example, to enrich themselves. For example, if someone forgot to remit the taxes or used the tax withholdings to keep the business afloat, they may still be responsible.
Responsible Persons Are Personally Liable
A responsible person is personally liable for a trust fund recovery liability, even if the employer is a separate business entity. If the IRS assesses this penalty against you and you fail to pay, the agency can seize your personal assets or take other collection actions.
The TFRP Interview Process
The trust fund recovery process starts when the IRS’s Federal Tax Deposit (FTD) Alert Program detects an anomaly in an employer’s payroll tax deposit history. Once the group manager receives an FDT alert, they assign a revenue officer to evaluate the employer’s payroll history.
In the case of a payroll tax delinquency, the revenue officer may try to enforce compliance by assessing a failure-to-deposit penalty, filing a federal tax lien, or collection. However, if the employer has failed to remit trust fund taxes, the revenue officer will typically pursue a TFRP assessment, starting with the Form 4180 Interview.
The Form 4810 Interview
The Form 4810 interview is the first step in the TFRP assessment process. IRS revenue officers conduct these interviews to determine who is responsible for employers’ trust fund tax delinquency.
During this interview, revenue officers ask the questions listed on IRS Form 4810 (Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes). The revenue officer must conduct this interview in person or over the phone, and they do not always accept completed forms from interviewees or their representatives.
The revenue officer can also interview you to determine if someone else is responsible. If you refuse to participate, the revenue officer may summon you and force you to complete the interview in person.
Understanding IRS Form 4180
IRS Form 4180 contains all the questions a revenue officer will ask during a TFRP interview. This form consists of seven sections:
- Section I – Person Interviewed
- Section II – Responsibilities
- Section III – Signatures
- Section IV – Business Information
- Section V – Knowledge / Willfulness
- Section VI – Payroll Service Provider (PSP) or Professional Employer Organization (PEO)
- Section VII – Personal Liability for Excise Tax Cases
The revenue officer will complete all applicable sections. The questions in Section II (Responsibilities) and Section V (Knowledge / Willfulness) will help the revenue officer determine whether the interviewee is responsible.
Many questions require Yes/No answers with minimal form fields where interviewees can provide explanations. Consider the following question in Section II as an example: “Did you authorize or make Federal Tax Deposits?”
Suppose you are a clerical employee who only makes federal tax deposits after a superior authorizes them. In that case, you still must answer “yes” to this question, even though you have no independent judgment regarding these payments.
If you must participate in a TFRP interview, contact us at The W Tax Group to prevent unnecessary issues from resulting in an assessment.
Appealing a TFRP Assessment
After the Form 4180 interview, if the revenue officer believes you are responsible, you will receive Letter 1153, notifying you of the proposed TFRP assessment. You will also receive Form 2751, Proposed Assessment of Trust Fund Recovery Penalty.
Suppose you disagree with the assessment and have additional information supporting your case. In that case, you can contact the listed contact person within ten days from the date of the letter and resolve the matter informally.
You also have the option to protest the assessment by mailing a written appeal to the Appeals Office within 60 days of the date of the letter.
If the proposed penalty amount for each period is $25,000 or less, you must send a small case request outlining your disagreements. You must submit a formal written request if the proposed penalty amount for any tax period exceeds $25,000.
Small Case Request
Your small case request must include the following:
- A copy of Letter 1153. Alternatively, you can provide your name, Social Security number, and address.
- A statement indicating that you request an Appeal’s conference
- A list of all your points of disagreement with explanations
Your small case request can address issues related to responsibility, willfulness, or penalty calculations. If you are disputing the IRS’s calculations, your statement must clearly state all dates, amounts, and computation errors.
Formal Written Request
Your formal written request must include the following items:
- Your name, Social Security number, and address
- A statement requesting a conference
- A copy of Letter 1153
- The tax periods listed in Form 2751
- A list of the findings that you are contesting
- A sworn statement detailing your disagreement and reasons for believing the penalty should not apply to you. This statement should include specific dates, names, and amounts to support your case.
If a law or other authority supports your request, include it in your statement and explain how it applies.
Note: While you can represent yourself at your conference, we recommend obtaining qualified IRS-authorized representation. If your representative attends without you, they must submit a power of attorney or tax information authorization to access or review confidential tax information.
FAQs:
Can the IRS assess the TFRP against a sole proprietor?
Sole proprietors are personally liable for their business taxes, and thus, these business owners are automatically personally liable if the IRS assesses the TFRP against them. If they establish their business as a separate entity (LLC), the IRS can still hold them personally responsible.
What is the statute of limitations on a TFRP assessment?
The IRS’s statute of limitations for assessing a TFRP is generally three years. This period begins on the later of two dates: April 15 following the year of the relevant quarter or the actual date the employer filed the payroll tax return. If the IRS does not assess this penalty before the statute of limitation expires, it can no longer do so.
What is the statute of limitations on TFRP collection?
Once the IRS has assessed a TFRP against a responsible person, it has ten years to collect this debt.
What happens if an employee is entitled to a credit, but their employer fails to remit their trust fund taxes?
The IRS pays credits and refunds to employees, even if their employers failed to remit their trust fund taxes to the government. Refunds and credits to employees are among the reasons why the IRS assesses harsh TFRPs against responsible persons.
The IRS assessed the TFRP against multiple “responsible persons.” Does that mean each responsible person must pay the entire penalty?
Multiple responsible persons are jointly and separately liable to pay a TFRP that the IRS has assessed against them. Suppose a revenue officer assesses a TFRP of $3,000 against six responsible persons. If two of these responsible persons each pay $1,500, the other four do not have to pay anything.
Is there an obligation to hold tax fund taxes in a trust?
Despite the name, an employer does not have an obligation to hold trust fund taxes for remittance to the Treasury in a trust account.
The employer as a separate entity no longer exists. Should I still pay the TFRP?
Yes, responsible persons are personally liable for trust fund recovery penalties. If the IRS assessed a TFRP against you, but the employer was deregistered or is no longer in business, you must still pay this penalty.
Navigating a TFRP Interview – Partner With a Reputable Tax Attorney
Do you need to prepare for a trust fund recovery penalty interview? Perhaps you already had the interview and need help responding to a proposed TFRP assessment. At The W Tax Group, we have the expertise and experience to help you resolve your situation. We can assist you in preparing for the TFRP interview and represent your interests throughout the process.
If the IRS has already assessed this penalty or other payroll tax penalties against you, we can explore your tax debt resolution options to minimize the penalty’s impact on your finances. These options include, among others, an installment agreement, a settlement (offer in compromise), or a temporary hold on collection action by the IRS (currently not collectible status).
If you may be facing a trust fund recovery penalty or any other business tax issues, take action today and schedule a consultation with us at The W Tax Group.
