Tax Relief

Why You Need Representation During a TFRP Investigation

Of the various business tax problems to face, payroll tax problems are among the worst. They’re not just complicated and difficult to sort through, but they can also result in a Trust Fund Recovery Penalty (TFRP).

Regardless of a business’s structure, the IRS can assess a TFRP equal to 100% of the unpaid trust fund taxes against anyone deemed responsible for the failure to collect or pay the tax. That includes business owners, partners, shareholders, and even employees. How does the IRS figure out who’s potentially liable? They do a TFRP investigation.

The stakes are high with these in-depth investigations, and one wrong move could put your personal assets at risk. Experienced representation is critical. Protect yourself by contacting us about our payroll tax debt services today.

Key Takeaways

  • Trust Fund Recovery Penalty (TFRP): This is a tax penalty the IRS may assess for unpaid trust fund taxes (usually involving payroll).
  • Personal liability: Unlike most other business taxes, responsible individuals can be personally liable for the TFRP
  • Finding responsible individuals: The IRS will review financial documents to identify potential people to interview.
  • 4180 Interview: The IRS uses these interviews to learn how your business does payroll, who’s responsible, and to determine who to assess the TFRP against
  • Tax representation: An experienced tax specialist can represent you and your business during the TFRP investigation, including responding to information requests and interviews.

What Is the IRS Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty is a penalty for failing to collect, account for, and/or pay trust fund taxes to the IRS. Typically, the TFRP applies when a business fails to deposit payroll taxes withheld from employee pay, including Social Security contributions, Medicare tax, and income tax. However, the TFRP may also apply to other trust fund taxes, such as federal excise taxes.

The IRS doesn’t assess this penalty against the business. Instead, the agency goes after the individual or individuals who are responsible for the unpaid taxes, as determined by a TFRP investigation. Keep in mind, the TFRP is not in addition to the unpaid tax. It’s just a mechanism to collect trust fund taxes from the responsible persons.

An Overview of the TFRP Investigation Process

Typically, an IRS revenue officer (RO) handles TFRP cases. Before an RO starts the investigation, they will make several attempts to collect the unpaid taxes from the business. If the business doesn’t pay or make arrangements for the tax debt, the RO will start an investigation, which consists of:

  • Requests for and reviews of financial documents.
  • One or more Form 4180 interviews.
  • Requests for additional information.

The goal of the investigation is to learn about the business’s finances, its payroll processes, and who’s potentially responsible for the unpaid taxes. Here’s a deeper look at the process.

Financial Document Review

The IRS RO will ask for financial information about the business. This may include requests for documents such as:

  • Loan records
  • Invoices and bills paid by the business
  • Canceled checks
  • Bank signature carts

The IRS may request these documents not only from the business, but also from third parties like banks. The goal is to identify who could potentially be liable for the TFRP so the RO can decide who they need to interview.

Form 4180 Interviews

TFRP interviews are often referred to as 4180 interviews because the RO uses the interview to complete IRS Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes.

If the RO seeks to interview you, they may send you Letter 3586, Meeting Scheduled with Individual for TFRP Interview. The RO may use a Summons if you ignore Letter 3586.

During these interviews, the RO is trying to build a case so the IRS can impose the TFRP against you, your colleagues, or any other individuals associated with the business. This information helps identify who had the responsibility for ensuring trust fund taxes were paid and whether they willfully failed to comply with this duty. After the interview, the RO will sign Form 4180 and ask you to do the same.

Request and Review of Additional Information

The RO may have more questions after the interview. This could result in requests for additional documents and/or interviews with other people.

What Happens After the TFRP Investigation Is Over?

Following the 4180 interview, the RO will most likely assess the TFRP by sending responsible individuals IRS Letter 1153(DO). This is the proposed TFRP assessment and comes with IRS Form 2751, Proposed Assessment of Trust Fund Recovery Penalty.

You have 60 days (75 days if you’re located outside the United States) to respond to the 1153 Letter by filing an appeal. Alternatively, you can sign Form 2751.

If you sign Form 2751, you’re agreeing to the assessment, but you’re allowed to change your mind after signing Form 2751 as long as you do so before the 60-day appeal window expires. If you ignore the letter and do nothing, you’re basically accepting the TFRP penalty.

Filing an Appeal

Filing an appeal will generally require you to:

  • Explain why you disagree with the TFRP and list out the areas of disagreement.
  • Explicitly request an appeals conference.
  • Identify the legal authorities and case facts to support your arguments.
  • List the tax period(s) in question.
  • Mail the appeal and accompanying documents to the RO handling your case.

If you want to take a less informal approach, you can call the person (likely the RO) listed at the top of Letter 1153(DO) and explain why you disagree. You’ll usually only have 10 days from the date of Letter 1153(DO) to do this, though.

Why You Need Representation During the TFRP Investigation

There are complexities and nuances that only a tax professional with TFRP experience knows and understands. An experienced tax professional can protect your interests and help you navigate the investigation process.

Communicating with the IRS

When you hire a CPA to help with a TFRP investigation, they’ll handle the communication for you. They’ll ensure you respond to the IRS by the correct deadlines and submit the right information in the proper format. They’ll also deal with phone calls from the revenue officer.

Handing communication over to a professional ensures that you don’t miss deadlines or provide any unnecessary information to the IRS. Your tax representative knows what facts and information the RO is looking for to build a case against you. They can help make sure you don’t accidentally provide this information when not required to do so.

Guiding you through TFRP interviews

A tax professional can speak with the revenue officer on your behalf and help you prepare for Form 4180 interviews. Prior to the interview, they can help you anticipate the questions you’re likely to hear and instruct you on the best way to present your answers so the RO doesn’t misinterpret them.

Building a defense

To assess a TFRP against an individual, the IRS must show that the individual was responsible for paying the tax and that they willfully failed to pay it. If applicable to your situation, your tax representative can build a defense to show that you were not responsible or willful.

For example, if the financial documents submitted during the investigation show your signature on canceled checks or your name on invoices, the RO may decide that you’re a responsible party. However, your tax professional can provide context and explain that although you signed checks, you only did so under the instruction of your employer.

If the RO determines that you’re a responsible party, they’ll then move on to willfulness. To establish willfulness, the IRS generally needs to show that you knew, or recklessly ignored, the fact that trust fund taxes were going unpaid. Unfortunately, you cannot claim a misunderstanding of the law to get past willfulness claims. The IRS just needs to show that you choose to pay others (creditors, employees, suppliers, etc.) instead of the IRS. Malicious intent or bad faith isn’t required.

In most cases, once the IRS proves responsibility, they’re usually able to meet the willfulness requirement. However, if there are any facts that indicate you did not act willfully, your tax professional can present them to the IRS.

Dealing with the TFRP

If the IRS assesses a TFRP against you, a tax professional can help you appeal the penalty if right for your situation. Otherwise, they can guide you toward the best resolution strategy and ensure you don’t face unwanted collection actions. Payment options include:

East Coast Tax Consulting Group Can Help With TFRP Investigations

Having a tax representative is critical if the IRS decides to investigate you for TFRP reasons. This is one of the most severe IRS penalties, and to protect yourself, you shouldn’t face an investigation on your own.

Depending on your current situation, we can help you set up a payment plan for your business, which may prevent the IRS from pursuing an investigation, or we can help you navigate the investigation. If the IRS has already assessed a TFRP, we can help you appeal or set up a resolution option. Look at this case study to see how we helped a past client.

If you’re facing payroll tax problems, including a potential trust fund recovery penalty interview, East Coast Tax Consulting Group offers free consultations. Let a TFRP tax pro examine your situation and advise you on an ideal course of action. Contact us by calling (866) 550-7655 or using our online contact form.

IRS TFRP Investigation FAQs

Who could the IRS interview during a TFRP investigation?
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An IRS revenue officer can focus on interviewing anyone they think could potentially be liable for the TFRP, including owners, managers, bookkeepers, and anyone involved with the business’s payroll.

Do I need to hire an enrolled agent or CPA if I’m asked by an IRS revenue officer to complete an interview?
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No, but depending on your level of involvement with the unpaid trust fund taxes, it might be a good idea to hire one. If you start an interview by yourself and later ask for a representative, the revenue officer must immediately stop the interview until you can consult with your tax representative.

What’s an IRS 784 Notice?
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IRS Notice 784 is a document that the IRS gives to anyone who could potentially be liable for the TFRP. It briefly explains the penalty, who could be liable for it, and why.

What is IRS Form 4180?
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IRS Form 4180 is a form that revenue officers use and fill out when conducting TFRP investigation interviews. Based on this information, the revenue officer may decide to conduct additional interviews and/or request additional documents.

Why should I hire a tax professional if the IRS thinks I owe the TFRP?
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The facts surrounding the failure to collect, account, or pay the trust fund taxes can be complex and confusing. It’s easy to accidentally say or do the wrong thing and make it easier for the IRS to conclude you’re responsible for the unpaid trust fund taxes. A tax professional protects your interests during this process.

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You deserve the best in IRS tax representation, tax preparation, and tax planning services. At East Coast Tax Consulting Group, you’ll work with a licensed CPA who will handle your case from beginning to end. We invite you to contact our team to schedule a free, confidential consultation.

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