Tax Lawyer's Blog

We frequently see corporations that pay the net pay to their employees and fail to make the required deposit of IRS payroll taxes in order to pay vendors, lessors, and subcontractors.

Usually, the corporation is well-intentioned and truly believes that it will be able to pay back the unpaid deposits in a relatively short period of time (i.e. before the IRS comes calling). In practice, however, this rarely happens.

What is more common is that the corporation is forced to continue to pay only the net payroll and use the IRS payroll tax funds to pay other corporate bills. After several successive quarters of diverting IRS payroll taxes, the IRS finally issues notices demanding payment of the undeposited taxes, plus interest and penalties.

If the company does not and cannot pay off the entire delinquent debt, including penalties and interest, the IRS will conduct interviews of its key corporate employees to determine who in the organization was responsible for the company’s failure to comply with the law. Responsible persons are assessed what is known as a Trust Fund Penalty  which is equal to the amount of the federal withholding taxes and FICA and medicare taxes withheld from employees pay. 

The interviews are called Form 4180 interviews because the form the IRS collection agents are required to complete while conducting the interview is IRS Form 4180.

Generally, the IRS determines responsibility by determining which corporate employees, shareholders, directors and/or officers who, during the periods of non-compliance, made decisions regarding which creditors of the company received payment and which did not. The IRS determines this by examining the bank signature cards, reviewing the businesses canceled checks and corporate documents and conducting interviews of third parties.

‘Lectric Law Library provies a good, brief summary of the law:

RESPONSIBLE PERSON – The “responsible person” penalty is imposed pursuant to 26 U.S.C. S 6672: Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, . . . shall . . . be liable to a penalty equal to the total amount of the tax . . . not collected, or not accounted for and paid over.

The IRS may recover a section 6672 penalty only if it shows that the individual (1) was a “responsible person ” and (2) acted willfully in failing to collect or pay over withheld taxes. Davis v. United States, 961 F.2d 867, 869-70 (9th Cir. 1992).

A person is responsible for the payment of trust fund taxes for purposes of the section 6672 penalty if he had the “final word on which bills should or should not be paid.” Maggy v. United States, 560 F.2d 1372, 1374 (9th Cir. 1977). The “final word” “does not mean `final’ but instead `the authority required to exercise significant control over the corporation’s financial affairs, regardless of whether[the individual] exercises such control in fact.’” United States v. Jones, 33 F.3d 1137, 1139 (9th Cir. 1994)

See also Alsheskie v. United States, 31 F.3d 837, 839 (9th Cir. 1994). A person who does all he can to cause taxes to be paid, and whose efforts are rejected by those with more control, is not a “responsible person.”

It is possible that a person who is not a shareholder, director or officer will be found to be responsible and an individual who is a shareholder and director will be found not responsible. Many unsuspecting bookkeepers have been hit with a trust fund penalty because their bosses had them sign all the checks and the IRS used this fact as evidence that the bookeeper and not the owner/President chose which creditors to pay.

There are two compelling reasons why you should never attend a 4180 interview without having an attorney present. First, at the end of the interview the IRS agent will require you to sign the form 4180 under penalties of perjury. You don’t want to say something that is inaccurate and unwittingly open yourself up to a criminal perjury prosecution. (Remember, what ultimately nailed Martha Stewart and Scooter Libby wasn’t the underlying crime the feds had been investigating, but rather obstruction of justice for lying to federal agents.) Second, the IRS agent will use anything you say in the interview against you in determining whether or not you are a responsible person. Remember, the IRS wants as many people as possible to be responsible because that increases its chances of collecting the penalty.

The IRS can go after each responsible person or it can choose to focus its collection efforts on only one person. It has no duty to be “fair” and collect the same amount from each responsible person.

If you were in a business that didn’t pay its payroll taxes and have been or think you might summonsed for a 4180 interview, contact an experienced tax attorney.

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