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Trust Fund Handbook page 1

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Internal Revenue Manual - Part 5. Collecting Process

5.7.1  Federal Tax Deposit Alerts

5.7.1.1  (04-01-2005)
Federal Tax Deposit (FTD) Alerts

1.       FTD Alerts are used to determine an employer’s compliance with employment tax deposit requirements for the quarter of Alert issuance, and for subsequent quarters until the taxpayer is brought into full compliance.

2.       The FTD Alert process identifies, at an early stage (i.e., before the return is due), taxpayers who have fallen behind in their deposits.

5.7.1.2  (04-01-2005)
Criteria for FTD Alert Issuance

1.       FTD Alerts are issued on taxpayers who are classified as semiweekly depositors and who have not made FTDs during the current quarter or who have made them in substantially reduced amounts. They may be identified by the presence of TC 971 AC 046 on a tax module.

2.       There are two levels of Alert issuance, both of which are assigned for field contact. They are identified by the following systemically generated codes:

·         Potential Pyramider, identified by an Alert priority code of "A" .The taxpayer had an unresolved account in notice status in each of the prior two quarters.

·         Potential Noncompliant, identified by an Alert priority code of "B" .The taxpayer is considered to be likely to owe without intervention based on our identification and selection process.

5.7.1.3  (04-01-2005)
Process for Alert Issuance

1.       Master File conducts the analysis cycle for FTD Alerts in the twelfth week of each calendar quarter. This will be in March, June, September, and December.

5.7.1.4  (04-01-2005)
Receipt of FTD Alerts

1.       FTD Alerts are sent directly from Master File to the Integrated Collection System (ICS) for direct assignment to the field.

2.       Contact the taxpayer within 15 calendar days of receipt of the Alert. If timely contact is not possible, notify the group manager. The group manager will decide if reassignment of the Alert is appropriate. If contact is delayed for more than 15 calendar days, note the reason for the delay in the case history.

5.7.1.5  (04-01-2005)
Pre-Contact Research and Analysis

1.       If the pre-contact research and analysis reveal:

A.      the taxpayer is not liable for deposits, close the Alert. Final return information may have posted after the Alert analysis.

B.      the taxpayer is assigned to ACS , contact ACS . Determine the account’s status. If ACS indicates that the taxpayer is current or no longer liable for employment taxes, close the Alert. If this information is unavailable, work the Alert and request that ACS transfer the account.

C.      the taxpayer is in bankruptcy, verify that Insolvency is monitoring the taxpayer’s compliance. Request input of TC 136 and close the Alert. A TC 136 prevents future Alerts from generating. It is reversed with a TC 137.

5.7.1.6  (04-01-2005)
Contact Procedures

1.       Follow the procedures in IRM 5.1.10, Taxpayer Contacts.

2.       Explain the reason for the visit. Recognize that Alerts generate based on the probability that the taxpayer has fallen behind in deposit payments.

3.       Provide the taxpayer with Publication 1, Your Rights as a Taxpayer.

4.       If the taxpayer provides documentation or other substantiating information that he or she is in full compliance, close the Alert.

5.       If the taxpayer is no longer required to deposit (i.e., out-of-business, no employees), promptly request input of TC 591 and close the Alert.

6.       If the taxpayer is in compliance and due to sporadic or seasonal payrolls the Alert analysis is unable to predict deposit compliance, request input of TC 136 and close the Alert. During the contact, briefly review Federal Tax Deposit requirements with the taxpayer and provide Notice 931, Deposit Requirements, or other document outlining the deposit rules to help explain the requirements. This may help to ensure the taxpayer remains in compliance.

5.7.1.7  (04-01-2005)
Taxpayer Not in Compliance

1.       FTD Alerts on delinquent taxpayers provide an early opportunity to assist taxpayers before their liability pyramids and the growing debt becomes more difficult to resolve.

2.       Review Federal Tax Deposit requirements with the taxpayer. Give the taxpayer Notice 931, Deposit Requirements, or other document outlining the deposit rules to help explain the requirements.

3.       Discuss the cost for failing to deposit taxes on time. Explain the FTD penalty to the taxpayer. Consider illustrating the cost to the taxpayer by showing the taxpayer the penalties incurred in the Alert quarter as well as prior quarters.

4.       Ensure that the taxpayer understands the consequences of continued noncompliance. Discuss levy and seizure provisions; discuss monthly filing and the special bank deposit provisions found in IRC 7512; and when applicable, discuss the provisions for the Trust Fund Recovery Penalty.

5.       Monitor the taxpayer’s compliance with deposits for the Alert quarter and subsequent quarters until the account is resolved. If the taxpayer cannot satisfy past due deposits while meeting current deposits, encourage the taxpayer to make current deposits first while working to resolve past due deposits.

Note:

When discussing Federal Tax Deposits with the taxpayer, explain and recommend the Electronic Federal Tax Payment System (EFTPS).

6.       Input a record of FTDs made by the taxpayer as a result of FTD Alert contacts using the <F3> DEPOSIT application within the ICS FTD Alert module. All FTDs (TC 650 only) made by the taxpayer for the Alert quarter from the point of initial contact until the Alert is closed should be input to the module using this application. These inputs do not upload to IDRS and are for tracking purposes only.

5.7.1.8  (04-01-2005)
Alert Closing Procedures

1.       Secure the 941 return for the Alert quarter. Use the appropriate closing code with TC 599 for the return secured.

2.       If full payment of tax, penalty, and interest is not received with the return, take pre-assessment action to resolve the outstanding liability.

3.       If resolution of the account is not imminent, consider prompt assessment action.

4.       Close the Alert when the taxpayer is brought into full compliance or when the prompt assessment, Bal Due, or Del Ret is received.

5.       The following options are available to close an Alert:

A.      Return Secured: The taxpayer was not in compliance with FTDs and the revenue officer secured a balance due return for the Alert quarter. The revenue officer should close the FTD Alert, create a pre-assessed or prompt-assessed Bal Due on ICS, and pursue collection.

B.      TP is in Compliance: The taxpayer was required to deposit and was fully current in doing so at the time of initial contact on the Alert.

C.      Not Required to Deposit: The taxpayer was not required to deposit for the Alert quarter.

D.      TP is Sporadic/Seasonal: The taxpayer is either a sporadic or seasonal employer with a fluctuating payroll. If the Alert analysis would be unable to predict the taxpayer's deposit compliance, the revenue officer should close the Alert and manually request input of TC 136 to suppress future Alerts.

E.      Brought into Compliance: The revenue officer ensured the taxpayer made all required deposits and secured the return for the Alert quarter. The taxpayer is fully current at the time of closure, and there are no additional balances owed.

F.      TDA/ TDI Received: The revenue officer received another module by which to control the case. FTD Alerts should be closed and the subcode changed to "000" when there is an open Bal Due or Del Ret on the account.

6.       If a new FTD Alert is issued while an Alert from a prior quarter is still open in inventory, the old Alert will be closed systemically and replaced with the new Alert.

5.7.1.9  (04-01-2005)
Transfer of FTD Alerts

1.       If the taxpayer is in another area, the FTD Alert can be transferred without a prior Courtesy Investigation.

2.       Due to the time-sensitive nature of FTD Alert contacts, call and advise the receiving office of the transfer.

3.       Transfer FTD Alerts only if the business itself, not merely one or more officers or partners, is located in the transferee area.

5.7.2  Monthly Filing and Special Deposits

5.7.2.1  (06-04-2002)
Letter 903 (DO)

1.       Letter 903 (DO) alerts taxpayers to the provisions of I.R.C. § 7512, Separate Accounting for Certain Collected Taxes and I.R.C. § 7215, Offenses With Respect to Collected Taxes.

Note:

These procedures should only be used in the most egregious cases of noncompliance and where the collection procedures have already been unproductive or would be futile to stop or reduce trust fund pyramiding.

2.       After issuance of Letter 903(DO), subsequent delinquencies by the taxpayer will be accelerated to the field for prompt enforcement action.

3.       Issuance of Letter 903(DO) is required before a taxpayer can be recommended for monthly filing and special bank deposits.

4.       Issuing Letter 903 (DO):

If

Then

The taxpayer is a in-business trust fund violator.

Consider issuing Letter 903(DO).

You believe a levy upon property of the business or its responsible persons would be ineffective to reduce pyramiding behavior.

Timely consideration of Letter 903(DO) procedures is important. (See IRM 5.10.3.4)

You are recommending issuance of Letter 903(DO)

Submit the case file and letter with one copy to the group manager for review and approval.

The manager does not approve the recommendation

Note the reason in the case file.

5.       When the Letter 903(DO) is approved:

a.       Hand deliver Letter 903(DO) and Notice 931, Deposit Requirements for Employment Taxes, to the taxpayer. If the taxpayer is not available, the letter and notice may be left at the place of business.

b.       Prepare Form 4844, Request for Terminal Action, to request input of TC 148–9. This provides for systemic control and subsequent follow-up. If a subsequent BAL DUE, DEL RET, or FTD Alert, is issued it will be coded with an "L" and it will be accelerated.

c.       Associate the copy of Letter 903(DO) with the case file.

Note:

The basis for the $100,000 figure used in the Letter 903(DO) is as follows:

·         I.R.C. § 7215 violations are punishable by up to one year of imprisonment;

·         Under federal sentencing guidelines, offenses punishable by one year or less, but more than six months are Class A misdemeanors (18 U.S.C.§ 3559(a)(6));

·         Under federal sentencing guidelines, Class A misdemeanors not resulting in death are punishable against individuals by fines of not more than $100,000 (18 U.S.C. § 3571(b)(5)).

6.       If the taxpayer has previously abandoned other business ventures, leaving unpaid and uncollectible tax liabilities, it may not be necessary or appropriate to place the taxpayer on monthly filing or special deposit requirements before seeking a civil injunction to stop further pyramiding. Consult with local Counsel when dealing with this situation.

5.7.2.1.1  (06-04-2002)
Revenue Officer Follow-up After Letter 903(DO) Issuance

1.       For cases received in the Collection Field function coded "L" indicating that the taxpayer previously was issued Letter 903(DO), take firmer actions, as described below.

·         If the taxpayer is not in compliance with filing and payment requirements, place the taxpayer on both:

A.      Monthly filing (See Treas. Reg. 31.6011(a)–5)

B.      Special bank deposit requirements (See I.R.C. § 7512)

·         The case should be monitored for ongoing compliance. The revenue officer should make a documented contact with the taxpayer at least once each month to remind the taxpayer of trust fund obligations.

2.       Document the case history with the reason for not proceeding with any or all of the above.

3.       If the taxpayer is in compliance, request input of TC 149 to reverse the TC 148–9.

5.7.2.2  (06-04-2002)
Monthly Filing and Special Deposit Procedures

1.       All administrative collection procedures should be taken before initiating Trust Fund Compliance procedures. For instance, appropriate levies and liens should first have been considered and appropriate trust fund recovery penalty investigations should have been pursued. With approval from local counsel, it may also be appropriate to use monthly filing and special deposit procedures while a taxpayer is exercising its collection due process hearing and appeal rights under I.R.C. § 6320 or 6330.

2.       Form 2674, Report of Trust Fund Violators, is used to recommend the number of months the taxpayer must file monthly or semimonthly. The taxpayer will remain on a monthly or semimonthly filing schedule for six months unless it is determined a longer period is appropriate.

3.       If the taxpayer is required to file Form 941–M, a return must be filed for each month in the quarter. If the taxpayer is required to file Form 720, recommend monthly or semimonthly filing based on the taxpayer’s Federal tax deposit requirements.

Example:

If the taxpayer is required to make semimonthly tax deposits with Form 720, recommend semimonthly filing.

4.       If you are recommending a monthly return, you will:

A.      Complete a Form 2674.

B.      Prepare a notification letter to the taxpayer. (See Exhibit 5.7.2–1 Letter 1608(P)).

C.      Submit the Form 2674 and notification letter to the group manager for approval.

D.      Retain a copy of the letter in the case file.

E.      Deliver the notification letter to the taxpayer personally.

F.      Request acknowledgment of receipt of the original letter; if the taxpayer declines to acknowledge receipt, leave the letter with the taxpayer.

G.     Give the taxpayer Form 941–M and/or Form 720, with your mailing address for filing the returns.

H.      Explain monthly and/or semimonthly filing requirements.

Note:

Begin the period covered by the first monthly or semi-monthly return on the first day of the first month of the calendar quarter.

I.         Explain Special Deposit of Taxes requirements and issuance of Form 2481. (See IRM 5.7.2.2.3).

5.       Inform the taxpayer that failure to comply may result in:

·         Prompt assessment of unpaid monthly liabilities.

·         Assessment of monthly liabilities based upon a return executed under I.R.C. § 6020(b).

·         Prompt enforcement action prior to the end of the calendar quarter.

·         More stringent requirements authorized by I.R.C. § 7512(b), and possible civil or criminal referral.

6.       Change the taxpayer’s Form 941 filing requirement from 1 to 10. Request input TC–136 to suppress FTD Alerts, if not previously done.

7.       I.R.C. § 7512(b) applies to withheld employment taxes, backup withholding, and certain withheld and collected excise taxes (i.e., local telephone service, toll telephone service, teletypewriter exchange service, and air transportation). It requires the creation of a separate bank account and deposit therein of such taxes. Deposits to the separate bank account are paid over the government when a return for the deposit period is due, instead of through the FTD system, which is one reason that monthly or semi-monthly return requirements are ordinarily established at the same time that I.R.C.§ 7512 requirements are imposed.

8.       Failure to comply with provisions of I.R.C. § 7512(b) subjects the taxpayer to criminal prosecution under I.R.C. § 7215.

·         Pursue cases that do not meet LEM 5, Section 4.1.(2) criteria (or where criminal prosecution will otherwise not be sought) for a potential civil injunction.

·         Form 2674, Section II, provides for revenue officer recommendation for issuance of Form 2481 under civil or criminal sanctions.

5.7.2.2.1  (06-04-2002)
Monitoring Compliance with Monthly Filing

1.       When monitoring taxpayer compliance, ensure:

·         Form 941–M and/or Form 720, with return envelope, is mailed to monthly filers between the 25th and 28th of each month.

·         Form 720 is mailed to semimonthly filers between 10 and 12 days before the due date of the return.

·         Form 940 is sent with the Form 941–M between the 25th and 28th of December.

2.       Upon receipt from the taxpayer of the completed form, you will:

·         Review the return for accuracy and compliance with deposit and paying requirements.

·         Ensure that a received date is present on the return.

·         Use Form 2482, Record of Trust Fund Compliance Program Case, sections I and III , to monitor Special Deposit of Taxes and filing compliance.

·         Retain the case in active inventory for a full filing quarterly period. Thereafter, local management may determine other appropriate means of monitoring such cases.

Note:

If the taxpayer has moved after receipt of the notification letter, then issue a Courtesy Investigation to monitor compliance.

5.7.2.2.2  (06-04-2002)
Processing Monthly Forms 941–M and/or Monthly or Semimonthly Forms 720

1.       To process the Forms 941–M and/or Form 720 follow the procedures below:

If Collection of the tax

Then

is not at risk

Associate all returns for the three months of the quarter.1.

 

Prepare a composite Form 941 or Form 720 no later than the end of the month following the close of the quarter.2.

 

Annotate the lower right hand corner of the Form 941–M and or Form 720 with the eight digit employee number.3.

 

Attach all Forms 941–M or 720 to the composite quarterly return.4.

 

Process routinely. See IRM 5.1.11, Delinquent Return Accounts.5.

is at risk

Prompt assess any monthly or semimonthly returns for that same quarter to avoid duplicate assessments.1.

 

Prepare Form 2859, Request for Quick or Prompt Assessment, with appropriate penalties and interest.2.

 

Attach returns to corresponding Form 2859 and process.3.

 

Retain photocopies in the file of all returns to be prompt assessed.4.

 

Annotate the lower right hand corner of Form 941–M and/or 720 with the eight digit employee number.5.

2.       Reminder:

3.       If the first month’s return for the quarter was not prompt assessed, but the second month's return will be prompt assessed, combine both returns on one Form 2859 and process. The third month's return for that quarter must also be prompt assessed on a separate Form 2859 with a note under "remarks" to the service center to associate this return with months 1 and 2 for that quarter.

4.       If the returns are received by another office, the receiving office will:

A.      Complete a Form 2482 showing the taxpayer's name, address, type of return, period covered, date received, amount required to be paid under I.R.C. § 7512(b), and the amount paid.

B.      Clearly mark Form 2482 “Return Received by (indicate office)” and

C.      Promptly forward it to the proper office so the information may be recorded on the taxpayer's control record.

5.       When removing a taxpayer from Monthly filing requirements (Form 941–M), do the following:

A.      Ensure the release coincides with the end of the calendar quarter.

B.      Prepare a letter to the taxpayer rescinding monthly filing requirements. See Exhibit 5.7.2–2, Letter 2216(P)).

C.      Submit the letter to the group manager for signature approval.

D.      Send the letter to the taxpayer by regular mail.

E.      Update the taxpayer’s filing requirement from 10 to 1.

F.      Request input TC 137 for future FTD Alert issuance.

G.     Request input of TC 149 to reverse the TC 148–9.

5.7.2.2.3  (06-04-2002)
Approval and Issuance of Form 2481

1.       The Compliance Area Director is authorized by Treasury Regulation 301.7512 –1 to:

·         Require a taxpayer to comply with the provisions of I.R.C. § 7512(b).

·         Relieve a taxpayer from compliance with I.R.C. § 7512(b).

2.       A Compliance Territory Manager has the authority to approve and issue Form 2481 cases which meet the following criteria:

·         Provisions of LEM 5, Section 4.1.(2), are met.

·         Criminal prosecution of the taxpayer is contemplated if the taxpayer does not comply.

·         The Compliance Territory Manager and the Criminal Investigation (CI) Special Agent in Charge are in agreement.

3.       Revenue officer group managers approve and issue Form 2481 in cases which do not meet the criteria of Lem 5, Section 4.1.(2)a, and where no criminal prosecution of the taxpayer is contemplated.

4.       The Compliance Territory Manager has the authority to relieve a taxpayer from compliance with I.R.C. § 7512(b) where potential criminal prosecution was contemplated if the taxpayer had failed to comply, while group managers have that authority when a potential civil injunction was contemplated if the taxpayer had failed to comply.

5.       Follow the procedures below for approval and issuance of the forms.

If

Then

The taxpayer is pyramiding trust fund taxes, and the seizure of the business would not yield net proceeds

Use I.R.C. § 7512(b) procedures before pursuing an injunction against the taxpayer under I.R.C. § 7402(a).

 

Prepare Form 2674 and Form 2481.1.

 

Submit forms and any related documents to the group manager for review and final approval of strickly civil cases.2.

The criteria in LEM 5, Section 4.1.(2) are met and criminal sanctions are contemplated.

Follow steps 1 and 2 above.1.

 

Note: The Compliance Territory Manager and the CI Special Agent in Charge will jointly review the case, and if all criteria are met, will sign Form 2674.

The Compliance Territory Manager and the CI Special Agent in Charge cannot reach agreement on whether to issue Form 2481.

The matter will be referred to the Compliance Area Director and Director, Field Operations Criminal Investigation for resolution.

A recommendation to issue Form 2481 is disapproved by the Compliance Area Director and Director, Field Operations.

The Compliance Area Director and Director, Field Operations will notate the Form 2674 and return it through channels to the originating revenue officer for association with the case file.

The Compliance Area Director and Director, Field Operations approve the recommendations that a notice be issued, he/she will sign Form 2674 and both copies of Form 2481.

The approved forms will be returned through the group manager to the originating revenue officer.

6.       After approval:

A.                  Hand deliver the Form 2481 to the taxpayer per I.R.C. § 7512(a)(2).

B.                  Request an acknowledged receipt of the original notice in the blank space below the "Certificate of Delivery" on the reverse of the duplicate Form 2481.

Note:

An acknowledgment, although desirable, is not essential to the validity of the document. If the person declines to acknowledge receipt of the notice, leave the original with him/her.

C.                  Request the taxpayer to insert the following: "Receipt of original acknowledged" followed by signature, title, and date.

D.                  Complete the "Certificate of Delivery" on the reverse of duplicate Form 2481, regardless of whether an acknowledgment is secured, and retain it with the case file.

E.                  Explain the provisions of the notice so the taxpayer will fully understand the requirement which must be met.

F.                  Update the information previously recorded on Form 2482.

G.                 Advise the taxpayer that failure to comply with special deposit requirements could subject him/her to civil and criminal procedures.

H.                  Obtain the name of the bank where the taxpayer intends to open the special trust account.

I.                     Request a copy of the bank signature cards after the account is opened, for association with the case file.

5.7.2.2.4  (06-04-2002)
I.R.C. § 7512 Case Control

1.       Revenue officers will monitor taxpayer compliance on Form 2482. The following actions should be recorded on Form 2482:

A.      Due date for first monthly return.

B.      Date Form 2481 was delivered and to whom.

C.      Fact of mailing required returns.

D.      Fact of filing and paying in accordance with Form 2481
requirements.

2.       On Form 4844, Request for Terminal Action, request that the taxpayer’s filing requirement for Form 941 and/or Form 720 be changed from FRC "1" to "9" or "10" (criminal or civil filers, respectively).

3.       Request input of TC 136, if not already input, to suppress FTD Alerts, when the taxpayer’s quarterly liability meets the dollar criterion for alert issuance.

4.       If the taxpayer moves, issue a Courtesy Investigation to monitor compliance.

5.7.2.2.5  (06-04-2002)
Monitoring Compliance With 2481 Requirements

1.       Monitor taxpayer compliance with the provisions of I.R.C. § 7512(b) for both civil and criminal filers by taking the following actions:

·         Verify on the dates specified in LEM 5, Section 4.1.(5) the following:

A.      Special trust account was opened.

B.      Trust funds deposited were in the correct amounts, as verified through payroll records, and were deposited within two banking days following their collection or withholding.

Note:

If verification by field visitation cannot be made on the dates specified in LEM 5, Section 4.1.(5), you and your group manager will confer to determine the earliest possible date thereafter when taxpayer contact can be made.

·         Monitor the taxpayer at least monthly to verify that:

A.      Special deposits continue to be made on a timely basis and in the correct amounts.

B.      Trust funds remain in the special trust account until payment with Form 941–M or Form 720

2.       Minimize the time spent monitoring compliance by requesting taxpayers to provide copies of deposit receipt slips.

Note:

Although Form 2481 demands full payment of the taxes shown to be due on the monthly and semimonthly returns, I.R.C. § 7512(b) requires the taxpayer to deposit only withheld or collected taxes.

3.       To determine partial or insufficient payments:

If

Then

A monthly or semimonthly return is received accompanied by a partial remittance.

The amount to be entered in the "Amount Due" column of Form 2482 is the amount required to be paid under I.R.C. § 7512(b), that is, the withheld or collected taxes.

The amount entered does not compare with the amount deposited.

Determine whether the taxpayer has violated the provisions of I.R.C. § 7512(b) and is subject to prosecution under I.R.C. § 7215 or 7402 Adversary proceedings.

5.7.2.3  (06-04-2002)

5.7.2.4  (06-04-2002)
Processing of BAL DUE Cases

1.       Take the following actions on prior BAL DUEs when a Form 2481 has been delivered:

A.      Secure a collection information statement.

B.      Secure an installment agreement representing the taxpayer’s maximum ability to pay BAL DUEs.

C.      Allow sufficient funds for the taxpayer to comply with the special deposit requirements.

D.      Retain the approved installment agreement in your inventory for manual monitoring.

2.       If an installment agreement cannot be secured, document the reasons why in the case file.

3.       If the taxpayer is complying with the requirements of the Form 2481 and there is no installment agreement, a levy will not be made unless:

A.      It will not materially impair the taxpayer’s ability to comply with the requirements of Form 2481.

B.      It has been determined the case no longer has criminal or civil prosecution
potential.

C.      It is in the best interest of the government.

4.       Notices of Federal Tax Lien may be filed and a levy may be made only upon the concurrence of the CI Special Agent in Charge if potential criminal prosecution may be considered for a taxpayer's non-compliance with I.R.C. § 7512. . If the Special Agent in Charge does not agree with a proposed civil action, the matter should be referred to the Compliance Area Director and Director, Field Operations for resolution of the disagreement. Normal collection activity may be resumed for taxpayers upon notification from the Special Agent in Charge that the criminal aspects of the case are concluded or the case is not being accepted for prosecution, and if no civil injunction will be sought.

5.       If only potential civil injunction is contemplated for a taxpayer's non-compliance with I.R.C. § 7512 requirements, then appropriate Notices of Federal Tax Lien may be filed and the taxpayer may be given the appropriate collection due process notices that follow the lien filing and precede the making of a levy. However, making a levy while a taxpayer's compliance is being monitored under I.R.C. § 7512 will ordinarily be inappropriate. If you want to levy, consult with local counsel and discuss the impact a levy may have on a potential civil injunction case..

5.7.2.5  (06-04-2002)
Referrals For Civil Enforcement

1.       Taxpayers who do not meet the criteria in LEM 5, Section 4.1.(2), may be recommended for civil injunction action for failure to comply with the provisions of I.R.C. § 7512.

Note:

This action is normally appropriate for taxpayers with minimal or no equity, or where seizure may not resolve the problem.

2.       You will:

a.       Prepare a report to Associate Area Counsel through your group manager addressing the facts of the case. Refer to the Legal Reference Guide, IRM 5.17, Chapter 4 "Suit by the United States" for guidelines.

b.       Recommend in the report that Associate Area Counsel consider instituting civil proceedings under I.R.C. § 7401 and 7402 requesting an injunction against the taxpayer to prohibit the incurrence of future unpaid trust fund tax obligations.

c.       Include copies of pertinent material, (e.g. Form 2674, Report of Trust Fund Tax Violations) from the case file.

d.       Forward to the group manager for review and approval, then submit to Technical Support Function for technical review before it is forwarded to Associate Area Counsel.

5.7.2.6  (06-04-2002)
Referrals For Criminal Enforcement

1.       When a taxpayer fails to comply with the provisions of I.R.C. § 7512 and the criteria in LEM 5, Section 4.1.(2), have been met; do the following:

A.      Consult your group manager as to the appropriate course of action, which may include a referral to Criminal Investigation.

B.      If a criminal referral is appropriate, then prepare form 2797, Referral Report of Potential Fraud Cases, submit the report through appropriate channels to the Area Fraud Coordinator.

2.       If the referral is accepted by Criminal Investigation, the special agent assigned to the case will contact the revenue officer.

3.       From the time of referral to the Special Agent in Charge, until the criminal aspects of the case are concluded, the Compliance Area Director believes that suspension of the civil aspects will imperil ultimate collection of civil liabilities, then bring the matter to the attention of Associate Area Counsel (SB/SE). Local SB/Se Counsel will coordinate with local Criminal Tax Counsel for the POD.

5.7.2.7  (06-04-2002)
Cancellation of I.R.C. § 7512(b) Requirements

1.       When you determine that a cancellation of I.R.C. § 7512(b) requirements is in order:

a.       Prepare in duplicate the cancellation notice referring to the original notice and paraphrase the language in I.R.C. § 7512(c).

Note:

Have the cancellation become effective as of the end of a quarter. This benefits the taxpayer and the Service.

b.       Prepare a cover memorandum setting forth the reasons for canceling the requirements.

2.       Forward to your group manager for signature in civil cases, and to the Compliance Territory Manager or Area Director, as appropriate, in criminal cases.

3.       The signed cancellation notice will be returned to you, through the Compliance Territory Manager and your group manager.

4.       You will:

A.                  Deliver or mail to the taxpayer the signed cancellation notice, along with a copy of Notice 931.

B.                  Review deposit requirements and when to start the deposits with the taxpayer, either in person or by phone.

C.                  Prepare Form 4844, Request for Terminal Action, to request the Filing Requirement Code be changed from "9" or "10" to "1" and TC 137 be input for future FTD Alert issuance.

D.                  Request input of TC 149 to reverse the TC 148–9.

5.7.3  Establishing Responsibility and Willfulness for the Trust Fund Recovery Penalty (TFRP)

5.7.3.1  (04-01-2005)
Introduction

1.       The TFRP is based on IRC Section 6672 and is used to:

·         Facilitate the collection of tax and enhance voluntary compliance

·         Serve as an alternative means of collecting unpaid trust fund taxes when taxes are not fully collectible from the company/business that failed to pay the taxes

2.       To administer the TFRP and for additional guidance, refer to:

·         Policy Statement P–5–60 ( IRM 1.2.1.5.14)

·         Section 7 of IRM 5.17, Legal Reference Guide for Revenue Officers

3.       The TFRP is a penalty provided by IRC 6672 against any person required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities. The penalty is equal to the total amount of tax evaded, not collected, or not accounted for and paid over. Assessments of the TFRP are possible based on liabilities for the following tax forms:

·         941, Employer's Quarterly Federal Tax Return

·         720, Quarterly Federal Excise Tax Return (see IRM 5.7.3.1.1)

·         CT-1, Employer's Annual Railroad Retirement and Unemployment Return

·         942, Employer's Quarterly Federal Tax Return for Household Employees

·         943, Employer's Annual Tax Return for Agricultural Employees

·         1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

·         945, Annual Return of Withheld Income Tax

4.       TFRP assessments against individuals are assessed on the Individual Master File (IMF) using Master File Tax Account Code (MFT) 55 and reference number 618.

5.       The TFRP may be imposed, with respect to the taxes described in (3) above for:

·         Willful failure to collect tax

·         Willful failure to account for and pay over tax

·         Willful attempt in any manner to evade or defeat tax or the payment thereof

6.       Although the TFRP is normally applied to employment tax returns for withheld income tax, withheld Social Security tax, or withheld Railroad Retirement Tax, the TFRP provided by IRC 6672 also applies to those excise taxes which are commonly referred to as "collected excise taxes" . Collected excise taxes (see IRM 5.7.3.1.1) are those which are imposed on persons other than the person who is required by law to collect the tax and pay it over to the Government (a collecting agency).

7.       The revenue officer will explore the possibility of asserting the TFRP against the collecting agency’s responsible persons and will follow the same procedures for investigation and recommendation of the TFRP on employment taxes or collected excise taxes.

8.       The full unpaid trust fund amount will be collected only once in a particular case, whether it is collected from the employer/collecting agency, from one or more of its responsible persons, or from a combination of the employer/collecting agency and one or more of its responsible persons.

5.7.3.1.1  (04-01-2005)
TFRP For Collected Excise Taxes

1.       A determination must be made on a case-by-case basis whether a "collected" excise tax is, in fact, collected. Only the following excise taxes are taxes which may be subject to the TFRP:

·         Tax on certain communication services (IRC 4251)

·         Tax on certain transportation by air (IRC 4261 or 4271)

·         Tax on crude oil windfall profit (IRC 4986 — repealed 8/28/88 , but subject to the TFRP for liabilities incurred prior to that date)

2.       Excise taxes which are not imposed on the person paying for the product, for example, on the manufacturer, producer, importer, or wholesaler, are not collected excise taxes under the meaning of IRC 6672. Gasoline, diesel fuel, and aviation fuel tax under IRC 4081 and 4091 are examples of excise taxes which are not collected and, therefore, do not fall within the meaning of IRC Section 6672 and are not subject to the TFRP (see IRM 5.7.3.1.2).

5.7.3.1.2  (04-01-2005)
Personal Liability for Excise Taxes

1.       The personal liability for excise tax (IRC 4103) is a tool to be used to collect from responsible persons certain excise taxes reported on Form 720 by the business taxpayer. The main difference between the TFRP for collected excise taxes and the personal liability for excise taxes is that the TFRP is an assessment of a civil penalty under Master File Transaction (MFT) code 55, while the personal liability for excise taxes is an assessment of the actual unpaid tax as either transaction code (TC) 150 or 290 under the responsible person's Social Security number.

2.       Taxes reported on Form 720 that are not subject to the TFRP but are subject to assessments of personal liability are identified on the return as the " IRS Numbers" listed below. These abstract numbers apply to taxes imposed at the source and not to the end user of the product. As such, the tax is not subject to the Trust Fund Recovery Penalty procedures.

·         060 — Diesel fuel

·         071 — Dyed diesel fuel used in trains

·         078 — Dyed diesel fuel used in certain intercity or local buses

·         035 — Kerosene

·         062 — Gasoline

·         058 — Gasoline removed or entered for production of 10% gasohol

·         073 — Gasoline removed or entered for production of 7.7% gasohol

·         074 — Gasoline removed or entered for production of 5.7% gasohol

·         059 — 10% gasohol

·         075 — 7.7% gasohol

·         076 — 5.7% gasohol

·         069 — Aviation fuel

·         014 — Aviation gasoline

·         077 — Aviation fuel for use in commercial aviation (other than foreign trade)

3.       Responsible and willful persons can become jointly liable with the business taxpayer for the excise taxes listed above which the business has reported on BMF Form 720, Quarterly Federal Excise Tax Return. When assessed against an individual, he/she will owe the same tax liability as the business taxpayer who filed the Form 720. The responsible person will also be liable for interest and certain penalties from the same date as the business taxpayer.

4.       The following procedures should be followed for investigating both TFRP and personal liability for excise tax cases:

·         Establishing responsibility — IRM 5.7.3.3.1

·         Establishing willfulness — IRM 5.7.3.3.2

·         Collectibility determination — IRM 5.7.5

·         Form 4180 Interview — IRM 5.7.4.2.1

5.       IRM 5.4.2.20 through 5.4.2.43 contains the procedures for establishing the personal assessment of excise taxes, information on the assessment statute expiration date, and the forms that should be used when proposing these types of assessments.

5.7.3.2  (04-01-2005)
Automated Trust Fund Recovery (ATFR) Program

1.       The Automated Trust Fund Recovery (ATFR) program is a National Standard Application used to control TFRP case inventories.

2.       Revenue officers use the program to:

·         Systemically download from IDRS the business master file name, address, and tax period data to establish a case

·         Calculate the trust fund penalty

·         Monitor assessment statute expiration dates (ASED) and determination dates

·         Make recommendations regarding assertion and non-assertion of the penalty

·         Systemically generate and control managerial approvals

·         Generate required forms and letters

3.       The application is divided into the following components:

·         Area Office Application (ATFR-AO)

·         Control Point Monitoring (ATFR-CPM)

·         Compliance Center Application (ATFR-CC)

4.       Cases must be worked on the ATFR system whenever possible. This ensures that the correct means of calculation and the current procedures have been followed in case processing, and that systemic records are created of the determination and assessment.

Note:

Only cases that cannot be processed on ATFR may be prepared manually.

5.7.3.2.1  (04-01-2005)
Monitoring TFRP Cases

1.       The ATFR system is used by the revenue officer to:

·         Review cases for imminent statute concerns

·         Help ensure the TFRP determination is made within the six month time period

·         Complete timely follow-up actions on the case and monitor follow-up dates to Letter 1153(DO) issuance

·         Update the TFRP calculation

2.       The group manager uses the ATFR system to:

·         Monitor the six month determination period

·         Determine if imminent statute cases have been addressed

·         Periodically review TFRP cases to ensure timely investigation and recommendation of the Trust Fund Recovery Penalty

·         Approve revenue officer actions

3.       CPM and the advisory units use the ATFR system to:

·         Track and monitor trust fund cases received from the field

·         Release the 2749 to the Compliance Center

·         Monitor cases assigned to Appeals

·         Input pertinent bankruptcy information

·         Set the final case disposition

5.7.3.3  (04-01-2005)
Basis for Liability Under IRC 6672

1.       The revenue officer must establish responsibility and willfulness when determining whether to proceed with assertion of the TFRP. A person is liable for the TFRP if the two statutory requirements below are met:

A.      The person against whom the penalty is assessed must be "responsible" ( IRM 5.7.3.3.1)

B.      The responsible person must have " willfully" failed to collect or pay over trust fund taxes to the government ( IRM 5.7.3.3.2).

2.       Unpaid withholding taxes may also be pursued under the provisions of:

·         Performance Bond Provisions of the Miller Act ( IRM 5.1.14.1.1)

·         IRC 3505 ( IRM 5.1.14.3)

5.7.3.3.1  (04-01-2005)
Establishing Responsibility

1.       Responsibility is a matter of status, duty, and authority. A determination of responsibility is dependent on the facts and circumstances of each case.

2.       Potential responsible persons include:

·         Officer or employee of a corporation

·         Partner or employee of a partnership

·         Corporate director or shareholder

·         Another corporation

·         Employee of a sole proprietorship

·         Surety lender

·         Other person or entity outside the delinquent business organization

3.       A responsible person has:

·         Duty to perform

·         Power to direct the act of collecting trust fund taxes

·         Accountability for and authority to pay trust fund taxes

·         Authority to determine which creditors will or will not be paid

4.       To determine whether a person has the status, duty and authority to ensure that the trust fund taxes are paid, consider the duties of the officers as set forth in the corporate by-laws as well as the ability of the individual(s) to sign checks. In addition, determine the identity of the individuals who:

·         Are officers, directors, or shareholders of the corporation

·         Hire and fire employees

·         Exercise authority to determine which creditors to pay

·         Sign and file the excise tax or employment tax returns, such as Form 941, Employer’s Quarterly Federal Tax Return

·         Control payroll/disbursements

·         Control the corporation’s voting stock

·         Make federal tax deposits

5.       The TFRP is available and may be appropriately asserted when the taxpayer is organized as a Limited Liability Company (LLC). The need for a TFRP investigation is based on how the LLC is classified for tax purposes.

A.                  When the LLC is a disregarded entity, the TFRP is not needed to establish liability against the single member owner as the single member owner is already the taxpayer for employment tax purposes and is fully liable for all employment taxes, not just the trust fund portion.

Note:

The TFRP may be asserted against other responsible persons involved in the operations of the disregarded LLC, such as bookkeepers and managers.

B.                  When the LLC is classified as a corporation or partnership for tax purposes, the usual procedures for determining responsibility and willfulness apply.

Note:

The TFRP determination must be made on an LLC classified as a partnership. Under state law the members of an LLC classified as a partnership are not liable for the debts of the partnership.

5.7.3.3.1.1  (04-01-2005)
Indicators of Responsibility

1.       The full scope of authority and responsibility is contingent upon whether the person had the ability to exercise independent judgment with respect to the financial affairs of the business.

2.       If a person is an officer or owns stock in the corporation, this cannot be the sole basis for a responsibility determination.

3.       If a person has the authority to sign checks, the exercise of that authority does not, in and of itself, establish responsibility.

Note:

Signatory authority may be merely a convenience.

4.       Persons with ultimate authority over financial affairs may generally not avoid responsibility by delegating that authority to someone else. If a potentially responsible person asserts that the duty to pay taxes or otherwise handle the financial affairs of the business was delegated to an employee:

·         Evaluate the facts and circumstances of the case

·         Determine whether the delegation rendered the person (delegator) powerless to disburse funds or dictate fiscal policy

Note:

Delegation may be relevant when determining willfulness.

5.       Persons serving as volunteers solely in an honorary capacity as directors and trustees of tax exempt organizations will generally not be considered responsible persons unless they participated in the day-to-day or financial operations of the organization and they had actual knowledge of the failure to withhold or pay over the trust fund taxes. This does not apply if it would result in there being no person responsible for the TFRP. Refer to IRC section 6672(e).

5.7.3.3.1.2  (04-01-2005)
Non-Owner Employees

1.       Policy Statement P-5–60 ( IRM 1.2.1.5.14) states that individuals performing ministerial acts without exercising independent judgment will not be deemed responsible. In general, non-owner employees 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 assessed the TFRP. Non-owner employees are those who do not own any stock, interest, or other entrepreneurial stake in the company that employs them.

2.       Ministerial acts are performed under the supervision of someone else and do not require independent judgment or decision-making ability.

Example:

The bookkeeper of a company is not an owner and is not related to an owner. She has check signing authority and she pays all of the bills that the treasurer gives her. She is not permitted to pay any other bills, and when there are not sufficient funds in the bank account to pay all of the bills, she must ask the treasurer which bills to pay. The bookkeeper is performing a ministerial act and should generally not be held responsible for the TFRP.

3.       A person is "responsible" for purposes of the TFRP if that person has "significant control" over the company's finances. "Significant control" means more than having the mere mechanical duty of signing checks or preparing tax returns or having a title that appears to have authority. However, a responsible person need not have the final word in the company regarding the payment of creditors. Officers and higher level employees of a company who are non-owners may still be required to sacrifice their jobs (i.e., quit) to avoid being responsible for the TFRP, rather than obey the orders of an owner to pay other creditors but not to pay current federal trust fund taxes as they become due. See Brounstein v. United States, 979 F.2d 952, 956 (3rd Cir. 1992).

4.       A non-owner employee is generally not a "responsible person " if the employee's function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid. However, if a non-owner employee, such as an officer, has significant control over making the company's other financial decisions about who to pay or has the ability to obtain financing for the company, then such an employee cannot avoid being responsible for the TFRP by merely showing that an owner or a lender limited his discretion on the specific matter of paying taxes that the company owed. See the examples below.

Example:

A non-owner employee works as a clerical secretary in the office. She signs checks and tax returns at the direction of and for the convenience of the owner or a supervisor who is a non-owner. She is directed to pay other vendors, even though payroll taxes are unpaid. The secretary is not a responsible person for the TFRP because she works under the dominion and control of the owner or of a supervisor who is a non-owner and she is not permitted to exercise independent judgment.

Example:

The long-time controller of a company was never a shareholder, director, or officer of the company, but he was responsible for overseeing the finances of the company, including the preparation of the payroll and filing the company's federal employment tax returns. He had the authority to sign checks in any amount and he dealt with the company's lender on a regular basis when the company experienced financial troubles, though he did not arrange or sign the lending agreement on the company's behalf. When the lender directed the company to pursue an orderly liquidation of its assets, the controller requested funds from the lender to make full payroll and pay the taxes due on the remaining employees, but the lender forwarded only enough funds for the company to make net payrolls. The controller made out net payroll checks to the remaining employees and paid none of the taxes due, rather than prorate the funds available to the company between payroll and taxes. The controller could be a responsible person for the TFRP. See Hochstein v. United States, 900 F.2d 543 (2nd Cir. 1990).

Example:

An experienced businessman was never a shareholder, director, or officer of a new company, but he served as the general manager of the new company during a seven month period. As general manager, he signed most of the company's checks to creditors, as well as signing net payroll checks to employees, and there was no monetary limit placed on his check signing authority. He told the bookkeeper which bills to pay. When the company was experiencing cash flow problems, he spoke to one of the owners about the company's delinquent payroll taxes. The owner told the general manager that these unpaid taxes were none of the general manager's business and he should not worry about paying the company's net payroll and missing its tax payments. Both the general manager and the owner believed that the general manager could not be held liable for the TFRP because he was not an owner or officer of the company; the general manager turned down an offer to become the company's president specifically because he was worried about the company's tax situation. The general manager could be a responsible person for the TFRP. See Gephardt v. United States , 818 F.2d 469 (6th Cir. 1987).

 

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