The TIGTA Finds IRS Faults in Trust Fund Recovery Penalty Appeals

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Federal tax law requires employers to withhold and remit income and employment taxes to the IRS.  The obligation to pay these taxes – referred to as “trust fund taxes” – generally arises when payroll checks are disbursed to employees and is extinguished when the employer properly and timely deposits those taxes to the government.

If the employer fails to timely deposit the trust fund taxes, the IRS usually attempts to collect them directly from the employer.  But, the IRS also has other options.  Specifically, under I.R.C. § 6672, the IRS may go directly after any “responsible person” who “willfully” failed to collect, account for, and pay the taxes.  For these purposes, the trust fund recovery penalty (TFRP) represents the employee’s portion of any employment tax—that is, the withheld income tax and the employee’s portion of the Federal Insurance Contributions Act (FICA) tax.  This remedy is civil in nature, but it is important to note that the IRS may also refer TFRP cases for criminal prosecution, particularly in egregious cases.

To collect the TFRP against the taxpayer, the IRS must follow certain procedures.  First, the IRS must conduct an examination to determine who is a responsible person and whether that person acted willfully.  If the IRS determines the TFRP is appropriate, it is required to issue the taxpayer a Letter 1153, Proposed Trust Fund Recovery Penalty Notification.  After receipt of the Letter 1153, the taxpayer has 60 days to file a written protest with the IRS contesting the TFRP determination.  The IRS Independent Office of Appeals (Appeals) makes the final administrative determination as to whether the TFRP is appropriate.

On August 12, 2020, the Treasury Inspector General for Tax Administration (TIGTA) issued a report entitled “Existing Controls Did not Prevent Unauthorized Disclosures and Case Documentation Issues in Appeals Trust Fund Recovery Penalty Cases.”  As part of its report, TIGTA sampled 125 Appeals TFRP cases and concluded that the IRS failed to follow proper procedure in at least 31 of those cases.  This Insight provides a summary of the TIGTA report.

Trust Fund Recovery Penalty  

As discussed above, the IRS may assert a TFRP against any responsible person who willfully failed to collect, account for, and pay the taxes timely to the government.  More times than not, responsible persons are company officers or owners.  However, any person (including an employee) may be a responsible person if he or she has the requisite control to make decisions regarding creditor payments.

But to be liable for the TFRP penalty, the responsible person must also have acted willfully.  For these purposes, “willfulness” generally means the intentional, deliberate, and voluntary decision to not remit the trust fund taxes to the government.  Thus, the responsible person must be aware of, or at least should have been aware of, the outstanding payroll taxes.  For example, a CFO may be willful if he or she is aware the company owes payroll taxes but makes the later decision to pay other vendors ahead of the IRS’ payroll tax claims.

Assessment of the Trust Fund Recovery Penalty  

 IRS collections is responsible for assessments of TFRPs.  Prior to any proposed TFRP assessment, an IRS Revenue Officer (RO) will generally request to have an in-person interview with the taxpayer.  During the interview, the RO will ask questions in an attempt to identify any responsible persons who acted willfully.  These questions include:

  1. Who made financial decisions regarding the company?
  2. Who signed company checks?
  3. Who controlled disbursement of payroll?
  4. Who prepared payroll tax returns/made payroll tax deposits?
  5. Who was active in the management of the day-to-day affairs of the company?
  6. Who made decisions regarding which debts were paid first?
  7. Who was an officer or member of the Board of Directors?
  8. Who owned a share of the company?
  9. Who controlled voting stock?
  10. Who had the ability to hire and fire employees?

After the interview, the RO may propose the TFRP assessment against one or more individuals.  The proposed assessment is communicated to the taxpayer or taxpayers through issuance of Letter 1153.  If the taxpayer disagrees with the proposed TFRP assessment, he or she may submit a written protest to Appeals within 60 days.

If the amount of the proposed TFRP assessment exceeds $25,000, the taxpayer must submit a “formal protest” to Appeals.  A formal protest includes: (1) a copy of the proposed TFRP notification letter or identifying information regarding the letter; (2) a statement that the taxpayer requests an Appeals conference; (3) the taxpayer’s name, address, and SSN; (4) a list of the penalties the taxpayer disagrees with and an explanation why; and (5) a statement of facts, signed under penalties of perjury.

The taxpayer’s filing of a written protest stays the TFRP assessment until a final determination is made by Appeals and for 30 days thereafter.  By way of background, there are three primary methods Appeals can settle TFRP cases.  First, a case may be settled based on factual settlement—a settlement based on an analysis of the facts of the case.  Second, a case may be settled based on allocation settlement—a settlement made that allocates the amount of the TFRP among the responsible persons.  Third, a case may be settled based on “hazards of litigation”—a settlement offered by Appeals based on its determination that there is substantial uncertainty about the outcome of the case if the taxpayer were to litigate it in federal court.

TIGTA Report  

In fiscal year 2018, Appeals closed 1,511 protested TFRP cases.  The TIGTA report analyzed 125 of those cases and concluded that Appeals failed to comply with proper procedures and law in 31 of them, or approximately 25% of the total cases.  More specifically, the TIGTA report identified the following flaws in the TFRP Appeals cases:

  1. Improper Communication. Appeals either contacted representatives who did not have the authority to act on behalf of the taxpayer or contacted the taxpayer instead of his or her power of attorney.  TIGTA noted that I.R.C. § 6103 protects confidential information from disclosure to improper persons, and I.R.C. § 6304(a)(2) prohibits the IRS from communicating directly with a taxpayer if it is known the taxpayer has an authorized representative.
  2. Penalties of Perjury and Written Protests. The Internal Revenue Manual requires written protests to be signed under penalties of perjury by the taxpayer or a valid power of attorney.  See IRM pt.  This requirement is important because the taxpayer avers that the factual statements in the protest are true, and the taxpayer may be guilty of a federal crime if the statement is later proved to be materially false.
  3. Documentation and/or Processing Errors. Appeals is required to prepare an Appeals Case Memorandum to explain and support the basis for a TFRP case disposition.  If Appeals identifies hazards of litigation as a means to resolve a TFRP case, the Appeals officer is directed to clearly identify the hazards and explain the decision to concede a certain percentage of the TFRP.  In several sampled cases, TIGTA concluded that Appeals had failed to follow the documentation and processing procedures.

The TIGTA report identifies several concerning issues regarding the disposition of TFRP Appeals cases.  After the TIGTA report was issued, IRS management indicated they plan to take corrective actions going forward to address these issues. Taxpayers with TFRP Appeals should be particularly cognizant of the penalties-of-perjury requirement as the TIGTA report indicates that Appeals may dismiss the case if the requirement is not satisfied within a specified timeframe.


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