Taxation & Estate Planning

Does the IRS have the right to see your personal finances before completing a trust fund investigation?

By howardlevy

IRS trust fund recovery penalty investigations are a sure source of unease.  Trust fund investigations can place personal liability on you for not paying your employees’ withholding taxes to the IRS.  

Adding to the dilemma is an IRS request during the trust fund investigation for a personal financial statement (Form 433A) detailing your assets, income and living expenses.

If the IRS makes a request for a personal financial statement during a trust fund investigation, two questions must be answered:  (1) Is the IRS entitled to know your finances before its investigation is complete? and (2) How can an early disclosure of personal financial information help in defense of a trust fund assessment?

First, there is no legal requirement that the IRS is entitled to financial information from you during the trust fund investigation.  The Revenue Officer assigned to your case is making the request for financial disclosure BEFORE final assessment of the trust fund taxes against you.   Personal liability is still in the fact-finding phase.  

Unless there are other assessments against you already, the IRS has no ability to force a financial disclosure as part of a trust fund investigation.   Disclosing financials to the IRS in this manner is providing collection information before there is even a balance due.   

Saying “no” to such a request must be done with balance:  respect as to an IRS investigation yet properly raising and protecting your rights as a taxpayer. 

Sometimes, however, disclosing the financial information early can help resolve the trust fund investigation in your favor.   If your financials shows that the IRS could never collect from you if you were held personally liable for the employment taxes, the IRS has discretion to not assess the trust fund recovery penalty against you.    

Internal Revenue Manual 5.7.5.3.1, Nonassertion Based on Collectibility, provides that “After reviewing and verifying the financial information, if the present and future collection potential is minimal, do not recommend assertion of the TFRP.”

It is not guaranteed that every Revenue Officer will drop a trust fund assessment due to uncollectability.  It is important to know your Revenue Officer if collectability is a defense to the trust fund recovery penalty.   Collectability is a valid consideration in investigations of the trust fund recovery penalty - know when to let the cat out of the bag.

Full post as published by IRS and the Law on January 17, 2010 (boomark / email).