How Does the Trust Fund Recovery Penalty Investigation Work?

The Trust Fund Recovery Penalty ( TFRP ) investigation is handled by the same officer who is assigned to collect the unpaid tax, looking into anyone who was responsible for the payment. The Internal Revenue Manual instructs these officers to look at the following evidence:

  1. Articles of incorporation
  2. Bylaws
  3. Minute books
  4. Who was responsible for filing returns and tax payment?
  5. Bank records
  6. Cancelled checks
  7. Bank account signature cards
  8. Financial statements
  9. Income tax returns
  10. Withholding tax returns

Despite this long list of potential routes for evidence sourcing, the officers usually concentrate on one main thing – Who had the signature authority on the relevant bank account? Form 4180 from the IRS is designed to provide a thorough analysis into the matter, also known as the ‘Report of Interview Held With Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Tax.’ When conducting interviews, the officers are told to cover:

  1. What the TFRP is
  2. Ask questions related to the penalty
  3. Gather info and documents
  4. Let people know that they could be held liable
  5. Provide Notice 784 with sufficient copies
  6. Look to get a Form 4180 from one responsible person, at least
  7. Tell them about their appeal rights
  8. Tell them when the assessment will be made
  9. Tell them that interest will rise until the penalty is paid
  10. Tell them that interest runs from the date of TFRP until the date of payment
  11. Give them the chance to agree/appeal

The officers are asked to secure a Form 4180 from any and all potentially responsible people at the company in question. However, the officers are also told to fill out the form themselves, rather than giving it to the relevant taxpayer. Despite this, Form 4180 is available online and, in the history of the form, it has never been refused when prepared by counsel. In fact, the officers are often happy to receive a full completed/signed form. It is important to note that these officers are often overworked and underpaid, meaning they tend to avoid anything that may waste time. They are known to shorten detailed answers down to a few keywords, phrases, or shorthands. While this is never a problem for those who are not disputing their liability, it can be for anyone who is, as the administrative shorthand can cause confusion or twist words. Overcoming such difficulties can also be a problem. Therefore, it is best for you to prepare the form yourself.

Form 4181 is also available, although it is rarely used – entitled ‘Questionnaire Relating to Federal Trust Fund Tax Matters of Employees’. While it is similar to the Form 4180, it is designed for employees who may not be liable for TFRP. Instead, they may merely be providing evidence to establish liability. This form can be used to clear the names of people who do not deserve to be held liable, while highlighting who should at the same time. In these cases, statements need to be collected from other employees to determine who did what at the company. Eyewitnesses are key. The officer will not rely on the statements from the taxpayer alone due to their bias, hence why other employees are so important. There is no reason why you can’t interview these employees yourself and fill in the form. In fact, this is often preferred as the IRS may choose to ignore some testimonies if left to their own devices.

Collectability determination In The Trust Fund Recovery Penalty Investigation

It is important to know that the IRS can and will withhold the TFRP assessment if it deems to be ‘uncollectible’. Those defending their clients can also look to prove that assessment would be pointless – the TFRP is not dischargeable in bankruptcy, for example. Therefore, in some cases, avoiding assessment altogether can spare wasted time, effort, and suffering. The manual itself says:

‘The Trust Fund Recovery Penalty (TFRP) will normally not be assessed when the likelihood of successful collection is minimal. In every case . . . (d)etermine collectability. Secure Form 433BA, Collection Information Statement (CIS), for individuals and/or 433BB, Collection Information Statement for Business. When a determination of present and future collection of TFRP is minimal, do not recommend assertion of the penalty.’

The way in which the ability to pay is determined is similar to instalment agreement requests or offer in compromise analysis. Officers are told to look at these factors when considering non-assertion:

  1. Financial condition
  2. Bankruptcy involvement
  3. History/potential of income
  4. Potential of assets
  5. Any previous TFRP assessments
  6. Any previous but currently non-collectable cases

In the manual, multiple examples are given as to when TFRP assertion should be withheld on the grounds of collectability. Therefore, if you can show similarities between your case and any examples within the manual, it can help your non-assertion claim.

Procedures for asserting the Trust Fund Recovery Penalty Following The Investigation


Sometimes, no matter how much effort you put in, the officer will still decide that TFRP is needed. At this stage, Form 4183 will be used – entitled Penalty Assessment Recommendation. This form must cover the following things before being sent to the group manager to be reviewed:

  1. Anyone considered for the Trust Fund Recovery Penalty investigation must be listed
  2. Recommendations must be made for each person (assessment or not?)
  3. Documentation and supporting facts must be presented for each person
  4. How wilful is each person to be held responsible? – Facts and documents to back it up
  5. Statements from each person

The form 4183 is always reinforced by a Freedom of Information Act request when assertion contests are involved due to its significance and attached documents/information. The same can be said when someone is looking to overturn a pre-assessed TFRP. When the manager receives the form, they will proceed to the review stage, at which point they will look at:

  1. Has the collectability been looked at properly?
  2. Are any recommendations adequately supported?
  3. Have all periods been addressed?
  4. Is everything correct with regards to the relevant guidelines and compliance?
  5. Are all the tax return copies included?
  6. Have these tax returns been assessed? Are they being forwarded for assessment?
  7. Does the information have a bearing on the recommendation if it has come from the potentially responsible person?

If you take the above requirements into account, you are more likely to receive a favourable reaction from the group manager.


The Trust Fund Recovery Penalty Investigation should always be taken very seriously as it usually rears its head when the business in question is either sinking or already underwater. Unfortunately, business owners often attempt to turn things around by avoiding trust fund tax payments, leaving them to go down with the ship rather than escaping in a life raft. Believe us, TFRP is not something to take lightly! The penalty is hard to beat and is designed to scare you into rolling over and paying. Escaping from the TFRP can give you a fresh start economically, but you can only do so when you have a good understanding of the procedures, legal arguments, and guidelines behind the penalty. Only then can you truly contest it with any hope of victory.

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