12. IRS INVESTIGATION TECHNIQUES

§ 5:64 In General

At any time after an employer fails to pay trust fund taxes, the IRS may begin investigating a proposed Trust Fund Recovery Penalty. It is standard practice for the Service to begin investigating any time a Revenue Officer discovers that a company owes taxes. Many times the Revenue Officer will begin the process when the company is still operating and has entered into a payment agreement with the Service. [IRM 5.7.4.8] If the payment agreement will be for more than 18 months, the potentially responsible officers must sign a statutory waiver to avoid assessment. [IRM 5:7.4.8] The Service views the Trust Fund Recovery Penalty as a collection tool and rightly believes that the threat of personal liability will cause the management of an operating company to maximize payments to the IRS. Such a policy can create severe management disruptions if corporate officers must try to juggle corporate financial problems, conflict to each other, and the potential for personal financial devastation if they are assessed a Trust Fund Recovery Penalty. In many areas, the Service will assess responsible persons and begin collection from the officers even though the corporation is still operating and making payments on its overdue taxes. [IRM 5.7.4.8]

§ 5:65 Interviews With Potentially Responsible Persons

The IRS normally begins its investigation Fund Recovery Penalty by interviewing corporate officers. The IRS utilizes an interview form titled “Report of Interview Held with Persons Relative to Recommendation of 100-Percent Penalty Assessments.” Upon review of the form you will note that the interview format takes two approaches: (1) the gathering of corporate financial and organizational information; and (2) the gathering of information relative to proving responsibility and willfulness.

§ 5:66 Participation In Meetings

Section III—Knowledge, Questions #3 and #4 can devastate many defenses to the Trust Fund Recovery Penalty. If your client participated in meetings relative to the nonpayment of taxes, a willfulness defense is almost totally barred unless he or she was actively misled during those meetings or the meetings take place months after accrual of the taxes. The responses to Questions #3 and #4 can also establish responsibility for making tax payments by tending to show participation in decisions regarding payment of taxes.

§ 5:67 Supplement IRS Form

Section III—Knowledge, Questions #1, #2, #10, #12 and #13 are directed to willfulness. Section III—Knowledge, Questions #1 through #15 go directly to the issue of responsibility. Ability to Direct, Questions #1 through #15 provide the IRS with the objective information which it uses as its primary evidence to assert liability. The IRS interview form leaves little room for presenting the subtleties which make the difference between assertion and non-assertion of a liability against a person. As a practitioner, it is wise to supplement your client’s answers during the interview with written clarifications which explain and clarify your client’s answers.