Dianne Smith* was hired as the secretary of George Bill in a startup travel agency business back in 2010. Her job, just like any other secretary, includes arranging the schedule of her boss, answering phone calls, running over the bank to do errands, and many other tasks. She had to deal with financial matters under direct orders from her boss but she had little to no power in terms of decision-making.
Recently, she saw George being interviewed by officers from the Internal Revenue Service and after a few days, she received a letter of notice for questioning because she was identified as one of the potentially responsible people for the Trust Fund Recovery Penalty (TFRP)
“What now?” Dianne worriedly asks.
Identifying the Responsible Person
Revenue officers start the investigation of businesses liable to the TFRP by identifying the people who had authority over the finances of the business. They need to establish the responsibility of the suspected people, which is indicated if the “person had the ability to exercise independent judgment with respect to the financial affairs of the business.”
The four main questions for identifying the responsible persons are:
- Who took part in the financial decision-making process?
- Who signed the checks?
- Who paid the bills?
- Who was assigned to tax reporting?
If you had any hand in the business’ finances and could be one of the potentially responsible people for the TFRP penalty, calm down. While the TFRP can be dreadful, if you think you are not supposed to pay for what the business owes the government then there are ways to get out of it.
The Interview With The Revenue Officer
You need to prepare first for the interview. Revenue officers are going to ask questions from the IRS Form 4180 or the Report of Interview With Individual Relative to Trust Fund Recovery Penalty or Personal Liability Excise Tax.
Once called for questioning, make sure to study it carefully and, even better, consult a tax attorney before the meeting. You are encouraged to bring a tax lawyer, an enrolled agent, or a CPA to represent you, especially if you are involved in the financial work process but just like Dianne Smith, you think you should not be accountable for the TFRP.
During the interview, the revenue officer may:
- Explain the TFRP and present the calculation of the business’ owed amount
- Provide Notice 784 (Could You Be Personally Liable for Certain Unpaid Federal Taxes?)
- Ask questions and gather more information and details that would support the TFRP
- Try to secure at least one Form 4180
Form 4180 will only be given in person by the revenue officer. If you agree to an assessment during the interview, the revenue officer will advise you of your appeal rights. So the next thing you would have to think about: How do you file for an appeal?
*Names and events in this article are fictional and used only to describe the Trust Fund Recovery Penalty.