Ask The California Employment Tax And Payroll Tax Attorney – Post Covid-19 – Dealing With IRS Revenue Officers Investigating Payroll Tax Violations

By Robert S. Schriebman
2020

Introduction

Small and medium size businesses will be navigating in uncharted waters. We do not know what the future will bring as we begin the process of reopening our businesses. Will there be customers? How long will it take to experience the new normalcy? Are we in for a depression? While no one knows the answers to these questions, we are all concerned about cash flow. I fear that many businesses, in order to stay competitive, may not be able to be fully payroll tax compliant. Businesses will have quarterly and annual state and federal payroll tax returns to file and payroll taxes to be paid to both the IRS and the EDD. They may fall behind. In order to stay competitive, turn a blind eye to AB-5 and continue to treat workers as independent contractors in order to avoid paying payroll taxes. These concerns may impact you!

In this article I will discuss the functions of an IRS Revenue Officer when they are assigned to investigate an employer for noncompliance and for falling behind in paying payroll taxes. I will review the IRS’ “4180 Interview” and share my thoughts with you about allowing the IRS or the EDD to question you.

Employment Tax Crimes and the Internal Revenue Code

Let’s start this discussion with an overview of compliance history. While payroll tax crimes have been on the books for decades, it has been rare for the IRS to criminally prosecute violators. Traditionally a chronic tax violator has been subject to civil penalties known as the 100 Percent Penalty, now known as the Trust Fund Recovery Penalty (TFRP); IRC § 6672 is the operative legislation. Basically, it states that responsible individuals within an organization may be held personally liable for their failure to withhold, account for, and pay over employee withholdings to the IRS. The IRS will disregard legal protections afforded by corporations and LLCs and go after people who are responsible for payroll tax compliance and who willfully fail in their compliance duties.

Every federal employment tax liability is composed of a portion belonging to the employee and a portion matched by the employer. The TFRP is composed of the types of taxes taken from an employee’s paycheck that belong to that employee – specifically, the employee’s portion of income taxes withheld and the employee’s portion of Social Security and Medicare taxes (FICA). The IRS refers to these taxes withheld from employees’ paychecks as “Trust Fund” taxes. The reason for this designation is that, by legal fiction, these portions are deemed held in trust by the employer for payment to the Treasury Department. The TFRP exposure is roughly 60% of what is owed by the corporation or LLC. The EDD’s version is a true 100% exposure!

Do You Have Criminal Exposure for Payroll Tax Violations?

If you operate as a sole proprietor you have total exposure to IRS and EDD tax crimes for failure to withhold, account for, and pay over withheld payroll taxes. If you do business as corporation or LLC, and you control the fiscal affairs of the enterprise such as signing checks, filing payroll tax returns and deciding who gets paid and who doesn’t, you most likely are the responsible person within the company and a prime target for civil and criminal penalties for payroll tax violations.

Who Are IRS Revenue Officers And What Do They Do?

In a nutshell, revenue officers are tax collectors. They are also assigned the task of investigating payroll tax violations and those responsible for them. Let’s look at how a revenue officer investigates potential violators.

Revenue officers conduct an extensive interview with those they feel may have exposure to the Trust Fund Recovery Penalty (TFRP). This is known as the “4180” interview. It is so named because the information taken from the interview is recorded on IRS Form 4180. The information on this form helps the revenue officer determine whether or not to impose the TFRP against you.

During this interview, the revenue officer may ask you to produce the documentary information. If you fail to do so, or refuse to cooperate, a summons may be issued. It’s scary stuff!

You must realize that payroll tax violations carry potential criminal charges that could be filed against you. If you have any chance of criminal exposure; you are best advised not to attend any IRS conference and to let the IRS assess the TFRP against you. Often this will happen without any concurrent criminal charges being filed. Remember, under the US Constitution, and more specifically, the Fifth Amendment, you cannot be compelled to testify against yourself.

What Is A 4180 Interview?

4180 is a form entitled “Report of Interview with Individual Relative to TFRP…” The form is used to identify persons within an organization who should be charged with the TFRP and occasionally criminally prosecuted. At the end of the form, the IRS requires a signature, date and a declaration that what has been told to the revenue officer is true, correct, and complete. The EDD also has a similar form that is required before the granting of an installment payment arrangement. Both the EDD and the IRS versions effectively constitute confessions to potential tax crimes. In fact, the EDD turns the signed confession over to the California Office of Tax Appeals (OTA), where judges use the form to deny relief from personal exposure to unpaid sales and use taxes. It is a system designed to work against any taxpayer.

Note: There is no law requiring anyone to engage in any dialogue with either the IRS or the EDD, or to allow oneself to be interviewed, let alone sign what amounts to a confession that can be used in a future criminal prosecution at both the state and federal levels.

Conclusion

As an attorney whose specialty is IRS and EDD payroll tax controversies, I have had over 50 years of experience representing clients who owe payroll taxes and do not have the ability to pay in full. I have represented many clients before the IRS in dealing with revenue officers and EDD collectors. Until recently I have not been too concerned about criminal exposure for payroll tax compliance violations. Having said this, I am now more concerned than ever about exposing employers to criminal prosecution at both the state and federal levels. More prosecutions are on the horizon. Be careful what you say to IRS and EDD auditors and especially collectors. They are not required to give you any type of Miranda warning that anything you say may be used against you in a criminal prosecution. If you are worried, get competent legal help first, before talking to any government official.