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Trust Fund Penalties are fines and fees imposed by the IRS on businesses, or, as we discussed in our previous blog post, Employment Tax: Trust Fund Penalty Assessment, responsible and willfully neglectful members of the business that did not properly pay the business’s Trust Fund Taxes. Trust Fund Taxes are the taxes that a business is required to withhold and match on behalf of their employees. These Trust Fund Taxes are made up mostly of Medicare taxes and Social Security taxes, and are sometimes also referred to as payroll taxes or employment taxes.

If you’re new to the subject, you can learn more about employment taxes, like what they are and what the differences are between employment taxes and self-employment taxes, by viewing the beginning of our Employment tax blog series here: What is Employment Tax?

In this blog post, we’ll build on our previous blog post, Employment Tax: Trust Fund Penalty Assessment, and dive a little deeper into the process following a Trust Fund Penalty Assessment.

The Trust Fund Penalty Assessment Process

If the IRS has found that a business has failed to pay its Trust Fund Taxes on time or in an insufficient amount, they will look to assess responsibility and willfulness. To assess this responsibility and willfulness, the IRS will look to conduct a Trust Fund Penalty Assessment Interview with any members of the business it views as potentially accountable. This is sometimes also known as a 4180 Interview, since the IRS representative will conduct the interview using Form 4180, the Report of Interview With Individual Relative to Trust Fund Recovery Penalty.

As of October 21, 2020, according to the IRS, responsibility can be determined “based on whether an individual exercised independent judgment with respect to the financial affairs of the business.” Meaning that an employee doing as directed by a superior is not held responsible in the eyes of the IRS, while the superior might be, unless they were also directed to do so. 

Since one of the main reasons a business might not be able to pay these Trust Fund Taxes in the proper amount or in a timely manner is because they used the funds to pay for something else, the IRS included that scenario in their example of willfulness, stating that “using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.” So, unfortunately, even if a business has fallen on hard times and needs to borrow money from other sources, like withholdings, that’s not a good enough reason for the IRS, and may actually be evidence of willfulness.

Avoiding the The Trust Fund Penalty Assessment Interview

Fortunately, there are ways to avoid the The Trust Fund Penalty Assessment Interview and mitigate the Trust Fund Penalty! 

If you, your business, or someone you know is struggling with the Trust Fund Penalty process, check out our Trust Fund Penalty Assessment Interview page to learn more or call us today to get help! 

In our next blog posts, we’ll discuss what a Collection Due Process is and what it means for your business. 

Sources

IRS – Employment Taxes and the Trust Fund Recovery Penalty (TFRP): https://www.irs.gov/businesses/small-businesses-self-employed/employment-taxes-and-the-trust-fund-recovery-penalty-tfrp

Trust Fund Penalty Assessment Interview

What Is A Trust Fund Recovery Penalty Interview?

A Trust Fund Recovery Penalty Interview and investigation permits the IRS (Internal Revenue Service) to collect unpaid taxes from businesses and assets of the individuals involved in the finances of the business. If the IRS believes you are responsible for the trust fund taxes, they will request an interview with you. The purpose of trust fund penalty assessment interview is to figure out if you are responsible for the recorded unpaid taxes or not. The interview is called a 4180 interview because the IRS agent will ask questions from the Form 4180 (Report of Interview With Individual Relative to Trust Fund Recovery Penalty).

What Is The “Trust Fund” In Regards To Form 4180?

Payroll taxes are withheld by the employer on behalf of each of the employees in trust for the U.S. Treasury. The amount of money the employee owes to the IRS is called “trust fund” taxes. This “trust fund tax” makes up the bulk of the payroll taxes due to the United States Treasury. Employers are responsible for calculating the taxes due from their employees’ earnings and sending it to the IRS on behalf of all employees.

 

When the IRS does not receive any money on behalf of the employee from a business, the IRS will then try to collect this trust fund tax by utilizing IRS Form 4180.

How to Avoid the 4180 Interview if Liable?

The best way to get out of the interview is to pay the bill and cancel the interview. You could also admit being liable by signing the Form 2751 (Proposed Assessment of Trust Fund Recovery Penalty) and then try to set up a payment plan or apply for a settlement.

 

If the bill is under $25,000, the business should be able to pay it back over a 24-month period. Once a business sets up payments, you no longer have to worry about any personal assets being at risk.

Examples of Personal Assets:

Automobiles

Jewelry

Furniture

Checking Account

Savings Account

How to Avoid the 4180 Interview if Not Liable?

If you are not responsible for the payment of Trust Fund Taxes, you can argue your liability. However, this can be extremely difficult and it is highly recommended to get a tax professional to assist you. Perhaps you accidentally signed off on a tax but you were not really responsible for the collection and payment of those taxes. The tax professional will have to prove that you are not responsible for the unpaid tax even if you were involved with the company finances.

How Can One Survive A Trust Fund Interview For Back Payroll Taxes?

If you are the person responsible for the collection and payment of the Trust Fund Taxes, accept the fact you are being held accountable for those taxes and move to resolve the resulting debt owed. However, if you are not responsible, then it is well worth the fight. The amount owed can be staggering since the more employees involved, the larger the liabilities will be.

Some reasons why the trust fund penalty is assessed when it should not be:

Next Steps:

Being honest and upfront is the fastest way to get this matter resolved. Although you may be liable,  it is best to contact a tax professional to confirm liability and assist you with moving forward. If you believe yourself to be innocent and should not be held accountable, then contact us to assist you. We can help you so please contact us for any questions or assistance with your current situation. Check for more information on our tax problem resolution services page.

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