Deciding Whether to Pursue a Liability – The Differing Standard between Trust Fund Recovery Penalty Cases and Examination Cases

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As we have mentioned before, Les, Steve and I are engaged in updating IRS Practice and Procedure by Saltzman and Book.  Last year I wrote a number of posts on Collection Due Process as I prepared to update that part of the book.  I have now created an entire chapter on CDP cases which will come out with the 3rd Edition of the book.  Now, I am beginning to update Chapter 17 which covers both transferee liability and the trust fund recovery penalty (TFRP).  So, look for more posts on those topics.  In this post I will examine a unique facet of the TFRP with respect to the when the IRS makes a decision to assess that liability.

In TFRP cases the IRS has decided that it has the ability to look at a taxpayer’s collection potential in deciding whether to set up a tax liability in the first place.  This post will examine the policy behind the decision that the IRS can use collection as a basis for not pursing a liability in TFRP cases yet it pays no attention to collection in ordinary examination cases particularly the cases involving low income taxpayers with little or no collection potential.


The determination to purse TFRP is made under IRM, which is made as soon as possible after the initial contact (IRM with the taxpayer and within 120 days of being assigned to a revenue officer.  IRM lists the factors to consider when determining the amount of the TFRP.  After the initial contact, collectability will be determined.  IRM gives the IRS the option of non-assertion based on collectability.  To assert non collectability the IRS will look to the factors listed in IRM  Those factors include:

  • Current financial condition
  • Involvement in a bankruptcy proceeding
  • Income history and future income potential
  • Asset potential (likelihood of increase in equity in assets and taxpayer’s potential to acquire assets in the future

More guidelines on the impact of collectability in making the TFRP assessment follow in IRM and (3), which includes:

If responsible person financial analysis shows. . . Then. . .
Any present or future ability to pay Assess the penalty and take the appropriate collection action based on an analysis of the taxpayer’s financial condition.
No present, but future ability to pay Assess the TFRP based on future income potential and possible refund offset. Prepare a pre-assessed Form 53 and file lien if appropriate.
The responsible person cannot be located or contacted but internal research identifies assets or income sources Assess the TFRP since there is a good possibility of some collection from the assets/income sources that were located.
No present or future income potential exists over the collection statute period Do not assess the TFRP since the financial analysis shows there is little prospect that the taxpayer will receive any increase in income or acquire assets that will enable the Service to collect any of the penalty.


The TFRP will normally not be assessed when:

  • There is no present or future collection potential.
  • Neither the responsible person nor their assets/income sources can be located

IRM discusses whether to pursue the TFRP in Installment Agreement or Bankruptcy Situations, while IRM analyzes TFRP in offer in compromise situations.

The focus on collectability before making the assessment in the TFRP situation stands in stark contrast the approach of the IRS in making an assessment in other situations.  The use of collection in the TFRP situation creates difficulties in reconciling the policy here regarding assessment with the Congressional policy on this type of liability expressed in the bankruptcy code.  The TFRP stands as the only tax liability incapable of getting discharged no matter how old the period for which the taxpayer owes the tax or how long ago the assessment took place.  Bad actions such as filing a fraudulent return, late return or no return can also result in a liability excepted from discharge but in those situations it is the action of the taxpayer with respect to the tax rather than the tax itself.

Given that the taxpayer cannot discharge the TFRP and the IRS has a guaranteed 10 years to collect the liability if it wants to have that period, why would the IRS choose this debt among all others to exercise a collectability determination as part of deciding whether to assess.  Why would it not save this type of determination for low income taxpayers and dependency exemption cases like the taxpayer Les wrote about on Mother’s Day?

I think that the IRS makes a distinction for TFRP taxes because this is the one tax that gets assessed by the collection division.  Employees of the collection division approach assessment with a pragmatism employees of the examination division do not.  While the IRS does not evaluate employees based on metrics (see Restructuring and Reform Act of 1998 Sec. 1204) such as how many dollars they have assessed or collected, exam employees generally measure their worth by the number and amount of assessment with little care for whether the assessment will ever be collected.  Collection officers, however, hate the thought of going through the assessment process for nothing.  As a consequence, they built into the portion of the assessment process they control a look at collection.  Nothing stops the IRS from applying this same logic to all assessments it makes.  If it did, probably a decent percentage of the assessments against low income taxpayers would go unmade.  That might be good for a system in which the IRS has limited resources.

It seems especially unsatisfactory that the one tax Congress chose to single out for the worst treatment in bankruptcy, the one tax based on the taxpayer’s breaching the trust to hold public funds for payment to the IRS, the one tax where the taxpayer responsible for non-payment nevertheless receives full credit for the unpaid withheld taxes on their individual income tax return and on the calculation of their social security benefits would be the tax that the IRS gives a break to deciding to make an assessment by looking first to its ability to collect the tax after assessment.  To limit this pragmatic approach to individuals engaged in behavior we otherwise view as reprehensible seems not to make sense.  Perhaps, the IRS should take another look at why it adopted the policy and why it only applies this beneficial approach to responsible officers who owe the TFRP.



  1. Keith,

    Updating Practices and Procedures is a noble cause; if you can get IRS to follow the IRM on Trust Fund issues, that would be a heroic cause.

    As lien filings have become the norm for IRS, the TFP has evolved to the point where the assessment has become the norm as well. Example, TFP’s are routinely begun on the front end of the collection process since a good chunk of their 120 days has lapsed before they begin work on the case; assessment taking place many times before the entity issues are resolved, many times before the installment agreement is reached. Appealing the issue up front with Settlement Officers for a resolution consistent with the IRM are met with the expected rubber stamp conclusion.

    Most striking are situations where an entity has achieved an installment agreement; often times the shareholders/responsible parties have accumulated assets during the good times, but find themselves underwater in their personal assets. Yet RO’s will then begin collection proceedings against the shareholders/responsible person(s) to ”help” them get in line with the National Standards. In other words, force the responsible parties to cease mortgage/loan payments on their personal assets to “arrive” at a reasonable monthly payment amount.

    Probably not the comments you were looking for, but certainly becoming a hardship on taxpayers and an interesting choice by IRS on how best to use their resources.

    • This comment is useful because it also suggests that policy and practice are not in sync. I am not surprised to hear these comments that the IRS is not making many decisions not to assess based on collectability. I would be interested in hearing from others if in some parts of the country the policy and practice are in sync.

  2. Keith,

    I read your latest post with great interest, mainly because this issue has come up with my clients several times in recent years. Yes, I agree with the logic of your analysis, but would not take it too seriously. Virtually every time that I have argued these IRM provisions before a Revenue Officer, and, after assessment of the TFRP, to an Appeals or Settlement Officer, my protest is denied. The Revenue Officers refuse to read the manual provisions, and the Settlement Officers in Appeals respond that these provisions are suggestive rather than mandatory. So, again, policy and practice diverge greatly. My question to both Revenue Officers and Appeals Officers is always to the effect that it is nonsensical for the Service to have three complimentary Manual provisions all saying the same thing, yet the Service pretends that they do not exist.

    • Thanks for the practical insight. Because my clinic does not handle these cases, my knowledge of the practical side is eight years old and even then it is spotty. I know some ROs in Virginia did follow this policy but do not know if that was outside of the norm. The policy was controversial and disliked by ROs when adopted. If it is not being followed, maybe the IRS should abolish it and have the same standard for making assessments in all cases.

  3. Lavar Taylor says


    In cases with which my office has handled, I can’t remember the last time a revenue officer conducting a TFRP investigation of our client actually paid any attention to the question of whether our client could pay the potential TFRP assessment during the course of the RO’s pre-assessment investigation. Maybe there are some ROs out there who pay attention to this provision and take it into account when deciding whether to send out the proposed assessment letter. But my experience is that this provision is almost always ignored by ROs, even where practitioners cite to the applicable IRM section.

    As for whether we will ever see the IRS formally take into account the inability to pay when conducting audits, I very much doubt that this will ever happen. One reason is that the IRS, as an institution, is supposed to determine the “correct” tax when it conducts an audit. Introducing a taxpayer’s inability to pay at the Examination level detracts from pursuing this goal. If you were to change the stated goal, specifically how would you change it? My own inclination is to not change the goal and to (formally) leave the issue of inability to pay to Collection.

    As a practical matter, Examination already has enough trouble adhering to the goal of determining the “correct” amount of tax owed without asking them to take into account whether the taxpayer can pay.

    I suspect that in some cases Examination already informally decides to not audit returns based on a belief that any tax assessed will never be collected. Private practitioners and their clients generally don’t see that happening, however, because the audit is never begun in the first place. I see nothing wrong with the IRS deciding to not audit a return based on a lack of collection potential.

    Raising the issue of the taxpayer’s inability to pay during the course of an audit is something that I’ve done from time to time, but I don’t do that unless I have a comfort level that my request won’t backfire somehow. Those pleas also have generally fallen on deaf ears, but there are individual cases where it makes sense for the revenue agent to take into account the lack of collection potential when conducting the audit.

    If the IRS starts an audit, formally inviting all taxpayers who are audited to ask the Revenue Agent to not pursue a particular course of action because the taxpayer claims that they can’t pay could create more problems than it solves. (For example, I suspect that Bernie Madoff is a “low income taxpayer” right now.) It seems to me that this type of “mercy plea” is better considered by the IRS on an ad hoc basis.

  4. Bob Kamman says

    The TIGTA report from last year paints a picture of an understaffed and probably undertrained Collection organization trying to push the boulder uphill. What’s surprising is that IRS didn’t commit any obvious errors in more than 60% of the cases sampled.

    ==We reviewed a statistically valid sample of 265 cases to determine the adequacy of TFRP decisions and Collection function actions taken on trust fund cases. For our sampled cases, 146 TFRPs were assessed for 108 of the 265 cases, totaling $38.4 million. We found that TFRP actions were untimely and/or inadequate in 99 of the 265 cases reviewed. For the 99 cases:
    · 65 cases had untimely TFRP actions, ranging from 31 to 910 days late.
    · 20 cases had TFRPs that could not be assessed because the assessment statutes expired on the tax delinquent accounts in the Collection Queue prior to assignment to revenue officers.
    · 10 cases did not have adequate support for collectibility determinations when the TFRP was not assessed.
    · 9 cases with incomplete TFRP investigations were closed with an installment agreement or as currently not collectible before determining whether the TFRP should be assessed.==

  5. I must agree with Mr. Taylor. Even when I have brought up this IRM provision to revenue officers during the 4180 process and provided financial information sufficient for a finding that the TFRPs, if assessed, would be uncollectible, revenue officers routinely ignore the collectibility determination required by the Manual. Having a collectibility determination before assessment of a TFRP or an income tax liability is a great idea, but such “big picture” thinking is usually beyond the Service’s ability and will probably remain there. I suspect that revenue officers in trust fund cases would rather assess the TFRP in order to continue working the BMF case, even if they know it’s unlikely the Service will ever collect a penny on the resulting TFRP balances. It’s a lot easier to explain to their manager that they did the investigation and made the assessment but were unable to collect than it is to say they never made the assessment at all.

  6. The problem with non assertion recommendation when there is low probability of collection is that many Group Managers and Upper Management indicate for Revenue Officers to complete assessment since the potential from collection may come from future tax refunds, offers in compromise, and possibly other future means of income. Remember that the IRS sees statistics as well as other agencies to view how IRS Collection is performing. Assessing TFRP against people who ignore payroll tax payments is an incentive to find ways to pay them instead of continued non payment. Educating people more on their personal liability potential may cause greater compliance. Many believe that since their business or employer is a Corporation, LLC, partnership. That they will not be responsible for an entities debts.

  7. Anonymous says

    There have been times when the corporation was unable to pay the entire liability up front, but could pay the TFRP portion. Before the IA was completed, I had the client pay the amount of the TFRP, designating it to be applied against the TFRP, thus eliminating the need for an assessment against the shareholder. Then the corporation entered into an IA for the remaining liability. While this may work some of the time, strategy-wise it may be useful for the corporation to pay as much of the TFRP portion as it can. ROs are unlikely to assess a small remaining unpaid portion.

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