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 5.7.4.1, which is made as soon as possible after the initial contact (IRM 5.1.10.3) with the taxpayer and within 120 days of being assigned to a revenue officer. IRM 5.7.4.1.1 lists the factors to consider when determining the amount of the TFRP. After the initial contact, collectability will be determined. IRM 5.7.5.3.1 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 5.7.5.1(1). 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 5.7.5.1(2) 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 5.7.4.8 discusses whether to pursue the TFRP in Installment Agreement or Bankruptcy Situations, while IRM 5.7.4.9 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.