Filling out a Form 4180 can be difficult due to the complexities as well as the subject matter since the IRS treats the trust fund as a grave matter.
In this article:
- What Is the Trust Fund Recovery Penalty?
- How Much Is the Trust Fund Recovery Penalty (TFRP)?
- How Does the IRS Proceed with the Trust Fund Penalty Process?
- How Should a Taxpayer Fill out IRS Form 4180?
- What Happens During the 4180 Interview?
Trust Fund Recovery Penalty Form 4180 Frequently Asked Questions
What Is the Trust Fund Recovery Penalty?
Before we cover the specifics of Form 4180, a taxpayer should brush up on his understanding of the TFRP. This includes knowing what the TFRP is, how much it costs taxpayers in penalties, and how the IRS finds taxpayers who fall under the TFRP.
Under Internal Revenue Code (IRC) section 6672(a), a taxpayer can merit penalties if they:
- Knowingly fail to pay the appropriate taxes;
- Consciously did not collect, more popularly known as withholding, taxes that are under their responsibility;
- Attempt to evade paying or filing the above taxes.
These penalties are additional fees added to the IRS penalties like the negligence penalty, accuracy penalties, and the common failure to file penalty. Penalties may start to accrue early, upon the IRS sending notices and letters for tax collection.
Specifically, the trust fund recovery penalty applies to taxpayers who need to withhold, file and pay for taxes that are not their personal tax responsibility.
Most employers fit the description of taxpayers under the purview of the trust fund recovery penalty process. Since the IRS may find it difficult to collect all taxes from different taxpayers, having a single collection nexus — the employer — makes the tax system more efficient and at the same time lessens the risk of non-filing and payment.
The trust fund recovery system plays an important part in tax collections for the IRS. This penalty does not only give additional tax revenues, but also ensures the collection of taxes run smoothly due to the fear of incurring additional tax burdens.
How Much Is the Trust Fund Recovery Penalty (TFRP)?
The taxpayer has to pay a penalty equivalent to the whole unpaid tax amount, which includes the fees.
For example, the employer did not pay the FICA (social security and Medicare), payroll taxes, as well as overstated salaries to lower the income bracket of the business. The total unpaid tax amount is $5,000.
Fees for the failure to file and pay, interest on unpaid taxes, and the penalty for not properly withholding FICA and other taxes reaches $2,000.
The total tax debt is $7,000 for the business. The TFRP then is $7,000, which brings the total tax liability of the employer to $14,000.
The IRS applies the highest possible calculation for the TFRP. Negotiating with the IRS may lower the tax debt, but the IRS reserves the right to still leave the TFRP higher than the new tax debt after the negotiation.
How Does the IRS Proceed with the Trust Fund Penalty Process?
The IRS finds taxpayers who fall under the trust fund recovery process through two systems. The main differentiator between these two systems lies in automation and manual reporting.
The first system mainly identifies possible perpetrators through an automated system that finds discrepancies between reported numbers from different sources, as well as red flags.
- An independent contractor has only one client who controls all their working hours. Both claim different statuses, with the freelancer saying he should be classified as an employee while the employer claims otherwise.
- Reporting income under different Tax Identification Numbers or Social Security Numbers raises a red flag not just for the TFRP, as a possible non-payment of FICA and other taxes, but also a possible tax audit.
- Employers filing for business expenses, usually salaries and contributions, with discrepancies against those reported by the employees.
- Tax report has a discrepancy between numbers for sales income compared to sales and excise taxes.
The automated system looks at two angles, the employer and the employee, and the employer in relation to his or her peers. Sometimes, the automated system may find discrepancies and send a notice immediately, but more often than not, an IRS agent reviews the issue first.
On the other hand, most TFRP cases fall under the second system, where the IRS receives a report or inquiry from any source. The IRS takes TFRP very seriously and can start the process with the issuance of Letter 1153 which asks the taxpayer for payment of the TFRP together with the tax amounts.
When a taxpayer replies to the IRS, he or she should fill out Form 4180. The IRS revenue officer then starts the interview using the Form 4180.
How Should a Taxpayer Fill out IRS Form 4180?
IRS Form 4180 only contains four pages, with Section 1 asking for identifying information. In the first section, the taxpayer or interviewee details his or her full name, address, contact information, SSN as well as EIN.
Section 2 has seven critical questions that either confirm or deny if the interviewee does fall under the TFRP process, like questions about authority over the business.
Section 3 looks for the signatures of all parties involved, but mainly the interviewee, the taxpayer, the interviewer, and the IRS revenue officer. This section also includes the date of the interview as well as requests for other notices and letters that the IRS revenue officer thinks will help the case.
Section 4 will ask for information about the nature of the business. In this section, information about the important individuals in the company, like the president and financial officer, should be filled out, as well as how the business pays their taxes.
Section 5 talks about the willfulness and knowledge of the interviewee about the cause of the TFRP.
Section 6 and 7 only applies if the business employed either a Payroll Service Provider (PSP) or Professional Employer Organization (PEO). Since the business used the services of these entities, the error most likely lies with these organizations.
On the last page, additional information, as well as signatures of the PSP or PEO, can be found.
What Happens During the 4180 Interview?
The 4180 interview actually follows the same line of questioning as the IRS Form 4180.
During the interview, the IRS revenue officer tries to get to the bottom of things to find out who is responsible for the TFRP penalty, as well as tries to identify other people responsible and the extent of their culpability.
Taxpayers should prepare to answer the following questions, which are also in Section 2 of the Form.
- Do you handle the financial direction and management of the business?
- Is your signature or authority needed to disburse or transact payments for bills as well as pay loans?
- Are you part of the team who handles the reviewing, preparation, signing as well as authorizing the transmission of checks?
- Do you have knowledge about the withholding, or lack thereof, of taxes?
- Is control of the authorization of payroll under your role or power?
- Are you the key person for making federal tax deposits?
- Do you have the authority to make or assign the electronic payment of taxes through the EFTPS?
- Do you handle the electronic banking part of the business, as well as hold the PINS/passwords?
The more the taxpayer or interviewee answers in the affirmative, the higher the chances of the IRS revenue officer assigning the interviewee as the one responsible for the TFRP.
The questions found in the Form 4180 are very specific, which can make the assigning of the TFRP difficult. Taxpayers who are undergoing the process do not need to worry if they are certain that they are not to blame.
Have you ever had to fill out Form 4180? What are your thoughts about the Trust Fund Recovery Penalty process? Share your story in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.