Surviving the IRS Form 4180 interview
Unfortunately, this is not the type of “trust fund” that your rich uncle would make you the beneficiary of. That would be nice, but today we have other things to discuss. Namely the trust fund interview form the IRS uses, known as Form 4180.
First what is the “Trust Fund” we speak about in regards to the form 4180?
The “trust fund” is a type of tax. Namely a type of tax that makes up most of the payroll taxes due to the United States Treasury. It works like this: Payroll taxes are those taxes an employer withholds from employees for income tax and FICA (Social Security/Medicare), along with matching amounts of social security and Medicare taxes that are due from the employers. This is probably confusing. So let me try to use an equation:
Total payroll taxes = (1) taxes withheld on behalf of employee in trust for the US treasury + (2) additional taxes employers have to pay when they have employees.
Part (1) is the amount you would see withheld on your pay stub. It would show the amount of income tax and FICA your employer withheld. That was your money, and instead of workers paying the IRS directly, they changed the law to require employers to act as third parties responsible for taking the employee’s money and sending it to the IRS on behalf of the employee. This amount of money that the employee owes to the IRS is what we call the “trust fund” taxes. Part (2) is the amount of taxes employees never see and employers pay. Most employees have no idea that employers are forced to pay an additional amount in taxes. The tax that an employer is required to pay is additional Social Security and additional Medicare tax. This is what is called the “Non-trust fund” portion of total payroll tax.
IRS Form 941 is used to calculate the trust fund and non-trust fund portions that an employer must send in. Although Form 941 is due quarterly, most payroll deposits are due bi-weekly.
When payroll taxes aren’t paid.
Typically what happens is an employer runs into a cash flow problem. They have enough money to pay the employees their wages, but not enough to also make all the required payroll deposits. This is quite common in seasonal businesses, and of course quite common in our 5-year economic recession. It is actually quite easy for an employer not to make payroll deposits. As far as the employee is concerned, the employee would never know — refunds are granted as if taxes were withheld according to the pay stubs. In a sense, an employer is borrowing money due to the federal government today to fund business operations tomorrow, with the hope that tomorrow will be better and the employer will be able to repay money “borrowed” from the IRS. Of course, it often doesn’t work this way. Many times, employers gamble wrong and wind up with a much bigger payroll tax liability than imagined, and an IRS Revenue Officer at their business, threatening to shut down the business. This is very often when a firm like ours steps in, in order to avoid the form 4180 interview.
Why the Form 4180 Trust Fund Interview then?
You see, if you think about it, the “trust fund” taxes are really employees money (even though, in most cases, the money may have never really existed). But the employer made a promise to pay an employee gross wages, net pay to the employee, and employee taxes to the IRS. But by not making payroll deposits, the employer is failing to honor its employment agreement. And the folks who are hurt are the IRS. They lose twice: First they don’t get the taxes. And second, they have to credit employees for tax payments their employers were required to make, but never did! So you see, because it is sort of like embezzlement, and because the IRS loses out so much, the IRS is incredibly, insanely aggressive about collecting trust fund taxes and imposes the form 4180.
Who is responsible?
Form 4180 is supposed to assist the Revenue Officer who is responsible for failing to make the payroll deposits. One does not need to be the actual owner to be held liable. Just someone who the IRS feels should have made the payroll deposits and hasn’t. Oftentimes, along with the principals, a Revenue Officer will see who else has signatory authority over bank accounts. The IRS also looks to see who was “willfull.” But this standard is not often paid attention to. For instance, I’ve seen cases where an employee was embezzling money which created a cash flow bind. Because of this bind, payroll deposits were not made. Yet, even though the owner of the company had money stolen from him, the IRS will still hold that the employer was “willful,”and will claim they are responsible which leads to the form 4180 interview. Many times people do not understand that this is a joint and several liability. The IRS can collect this tax from as many people as possible, but not more than what is owed. It can’t collect the same money twice, but it is under no obligation to apportion the amount collected, the IRS is fine if Party A pays 0% while party B pays 100%, regardless if one party was more to blame than the other. As soon as the trust fund assessment is made, everyone and anyone is just as guilty in the the eyes of the IRS.
How to survive a trust fund interview for back payroll taxes.
If you are the person responsible, just say so. Don’t fight the IRS needlessly. Accept the fact that you are a person who will be held accountable for trust fund taxes and move on to resolving that debt. Hopefully you have a legal representation that knows the best way to resolve this debt including an Offer in Compromise on a running business (if your tax representative is unfamiliar with how an Offer in Compromise on a running business works for back payroll taxes, you may want to consider a different law firm). However, if you do not think you should be held responsible, then guess what I am going to say? You must get yourself an experienced attorney who can help you fight a proposed form 4180 trust fund assessment. Look, the numbers can be huge. The more employees; the bigger the liabilities.
There are a few reasons why the trust fund is assessed when it should not have been:
- Aggressive revenue officers took short cuts and want to name as many people as possible responsible;
- The taxpayer failed to properly document and build case make a case, showing that while they were involved in company’s finances, they actually had no control over how payroll deposits were made;
- Taxpayer or his representative failed to properly appeal;
- Taxpayer signed document just to appease Revenue Officer, the intimidation worked;
- Non-responsible party was represented by company attorney with conflict of interest;
- There was a “ganging up” against a non-responsible party who didn’t know how to fight back;
- There was a dispute in ownership;
- Failure to understand just how important it is to fight, the hearing is very informal but the result, long lasting and drastic.
So what does a Form 4180 look like?
The IRS does not publish Form 4180 on its website. It is for their internal use only. Of course, I have a blank I could post. But I am far too reluctant to publish the entire form 4180, as I don’t want anyone thinking this is something that they can do themselves. Let’s be honest — if you are being assessed the trust fund recovery penalty you need the highest level of legal representation available. But it is the internet, so here is a screen shot of the first page: