IRS 941 Trust Fund Investigation

When a business owes payroll taxes to the Internal Revenue Service the liability or exposure goes beyond the business owing the payroll taxes.  When employment taxes are owed to the IRS, the IRS can personally assess individuals from within the business a portion of the employment taxes known as the Trust Fund Recovery Penalty (TFRP).  To assess individuals the TFRP, the IRS conducts a trust fund investigation.  This article has been prepared by a tax attorney to provide information relating to the trust fund investigation process. Contact the McGuire Law Firm to speak with an attorney about the trust fund investigation process.

 

What is the 941 Trust Fund?

Prior to discussing how the IRS goes about their trust fund investigation, it is important to understand what the trust fund is.  The trust fund amount is the amount of social security and Medicare tax and the federal withholding tax withheld from an employee’s paycheck.  This amount is deemed to be held in “trust” by the IRS to be paid over to the Department of Treasury so the individual receives credit for the withholding.   The IRS takes the trust fund amount very seriously, hence why they can personally assess and collect the trust fund separately from the corporation, LLC or entity that has accrued the underlying the 941 or payroll tax debt.

 

When is the Trust Fund Investigation Conducted by the IRS?

First and foremost, for the IRS to conduct the trust fund investigation there must be a 941 tax liability.  That being said, once a revenue officer is assigned to collect the employment tax debt from the business entity, one of the first steps the revenue officer takes is to begin the trust fund investigation.  Thus, the trust fund investigation will generally be initiated within a few weeks to a month of when the IRS revenue officer is assigned whether or not known to the business owners. 

 

What Does the Trust Fund Investigation Consist Of?

The investigation will consist of the revenue officer reviewing corporate or partnership documents such as tax returns, articles of incorporation or organization, bylaws or partnership agreements, bank statements, cancelled checks and any other information or document that may shed light as to who within the business has the necessary authority and control to be personally assessed.  The IRS revenue officer will also conduct what is called the 4180 Interview.

 

What is the 4180 Interview?

The 4180 Interview is an interview conducted by the IRS with individuals within the business of which the IRS feels may be willful and responsible parties.  The 4180 Interview asks questions relating to an individual’s role, position and duties within the company, their knowledge and actions taken relating to the payroll tax debt and who else, if anyone could conduct certain actions within the business.  The 4180 Interview provides significant information to the IRS about the individual taking the interview and others within the business who may also need to be interviewed.  Generally, any owner, officer or director within a business would be asked to conduct the 4180 Interview.  The failure to conduct the interview may lead to the IRS proposing the personal assessment of the trust fund to the individual if other information, such as the tax returns or the bank signature cards show the individual held a certain position of control of authority within the business.

 

What are Common Documents Requested or Obtained by the IRS During the Investigation?

The IRS will almost always request the bank statements, cancelled checks and bank signature cards for the business for the tax quarters whereby the 941 taxes were accrued.  Additionally, the IRS will generally request and review the employment tax returns and income tax returns for the business as well as internal business documents and agreement depending upon what the business may or may not have. 

 

What Happens After the IRS Has Conducted the Trust Fund Interview?

After the revenue officer has conducted their trust fund investigation, the revenue officer will propose the personal assessment of the trust fund to the individuals the revenue officer has determined is a willful and responsible party for withholding and paying over the withholding taxes.  The IRS can propose the trust fund assessment to one or more individuals within the business and the debt is a joint and several liability meaning that the IRS can collect the full amount of the trust fund from one individual even when multiple individuals have been assessed.  

 

Can the Assessment of The Trust Fund be Appealed?

Yes, you can appeal the proposed decision of the trust fund.  When the IRS proposes the assessment, you have 60 days from the date of the notice to appeal the assessment.  The appeal will be held with an IRS Appeals Officer and the appealing individual needs to show why they do not have the requisite power, authority and knowledge to be held responsible.  

 

What Happens Once an Individual is Assessed the Trust Fund?

Once assessed, the trust fund becomes a personal liability to the IRS.  The IRS can file a federal tax lien attaching to the individual’s assets and take collection action against the individual such as bank levies, wage garnishments and the potential seizure of other personal assets.

 

How Can I Get Assistance with an IRS 941 Trust Fund Investigation?

If a business you own, manage or have any control over owes payroll taxes (941 taxes) to the IRS it is likely you could be subject to the trust fund investigation.  It is recommended you speak with a tax attorney regarding your personal exposure to the trust fund.  A tax attorney can represent you before the IRS prior to and during the 4180 Interview as well as appealing the assessment or resolving the tax due if assessed.  You can contact The McGuire Law Firm for a free consultation with a tax attorney regarding the above matters.