5. IRS INVESTIGATION OF RESPONSIBILITY

§ 5:22 In General

On February 2, 1993, the Internal Revenue Service amended its manual [IRM P-5-60] to provide as follows:

Responsibility is a matter of status, duty, and authority. Those performing ministerial acts without exercising independent judgment will not be deemed responsible.

In general, non-owner employees of the business entity, who act solely under the dominion and, control of others, and who are not, in a position to make independent decisions on behalf of the business entity, will not be asserted the trust fund recovery penalty. The penalty shall not be imposed on unpaid, volunteer members of any board of trustees or directors of an organization referred to in § 501 of the Internal Revenue Code to the extent such members are solely serving in an honorary capacity, do not participate in the day-to-day or financial operations of the organization, and/or do not have knowledge of the failure on which such penalty is imposed.

§ 5:23 Reasons For Changed Policy

Over the years, the IRS has unfairly asserted the Trust Fund Recovery Penalty against many individuals. The IRS adopted new policies on February 2, 1993, in an attempt to avoid some of the prior abuses of the penalty. The author has found that it is now easier to avoid assertion of the penalty against titular officers. In one case the IRS dropped its efforts to assert the penalty against the unpaid treasurer of a charity.

§ 5:24 Check Signing Authority

The IRS investigation tends to center on signatory power on checking accounts. A standard practice is to summon each of the corporate banks for signature cards, cancelled checks, corporate resolutions and monthly statements. Persons with authority to sign cheeks are usually interviewed by the IRS during its investigation. Many Revenue Officers give inordinate weight to such evidence. The practitioner must emphasize that check signing authority and the exercise of that authority do not in and of themselves establish liability. The full scope of a person’s authority must be considered. [IRM 5.7.3.3]

§ 5:25 Corporate Office

The IRS also seeks to determine the names of corporate officers during its investigation. Great weight is given to the title “President.” If the IRS can locate the corporate books, it will use the descriptions of duties of the respective officers as evidence. The fact that a person is an officer or owns stock in a corporation should not be the sole basis for a responsibility determination. [IRM 5.7.3.3]

§ 5:26 Signatures On Tax Returns

The Service will secure copies of each of the tax returns to determine who signed them. It will consider such signatures to be an indicator of responsibility. It will also use signatures on payment plans with the IRS as evidence of responsibility.

§ 5:27 Outward Indicators Of Responsibility

As is clear from the above, the IRS investigation centers on the outward indicators of responsibility, such as check signing ability. This technique is not necessarily an accurate indicator of who had the “final word” in the company. [IRM 5.7.3.3.1.1] One’s signature on checks may have been made at the direction of some other person in the corporation. A mere titular officer without any real authority pan become a target of the IRS investigation. Some sophisticated business men and women have created, organizations where they avoid corporate titles but in fact control the business. The great weight given by the IRS to objective signs of authority must be overcome by testimonial evidence.

§ 5:28 Shotgun Approach

Most Revenue Officers take a shotgun approach to imposing the Trust Fund Recovery Penalty. They tend to propose liability against all persons involved with the corporation with any objective; indication of authority. This method causes each such person to mount a defense. Since the best defense; for a potentially responsible person is to identify the true responsible persons the IRS approach causes it to gain invaluable evidence from persons seeking to absolve themselves of responsibility. When confronted with conflicting claims of responsibility, the Service usually assesses everyone and lets the parties litigate the matter.