Bank Summonses and Witness Interviews in a Trust Fund Investigation

A Trust Fund Recovery Penalty case is built on two things: what you say, and what the paper says. The Form 4180 interview covers the first. This guide covers the second.

The Revenue Officer wants to know who had signature authority on the bank accounts, who approved payments, and who got paid while the IRS did not. The best sources for that information are not you. They are your bank, your bookkeeper, your payroll company and the people who used to work for you.

The Internal Revenue Code puts guardrails around how the IRS goes to those people. Knowing the guardrails tells you how much time you have and what you can do with it.

What the Revenue Officer Is Looking For

IRM 5.7.4.2.7 lists the core evidence that, in most cases, supports a TFRP recommendation:

• Form 4180 interviews;
• articles of incorporation;
• bank signature cards, or electronic PIN and password assignment information; and
• a sampling of canceled checks showing payments to other creditors in preference to the government, or, only if the business predominantly uses electronic banking, bank statements showing debit payments made in preference to the government.

The IRM tells Revenue Officers to request these documents from the business first, with a deadline. If the business does not produce them by the deadline, the next step is a summons to the business, the bank, or both.

For more complicated businesses, the IRM allows Revenue Officers to go further: partnership agreements, minute books, Forms 941 and 1120, payroll records, payroll service contracts, loan applications, and records of loans and salaries to officers. The IRM says the more convoluted the corporate structure, the more documentation is needed to support an assertion.

The Notice Rule: IRC 7602(c)

IRC 7602(c)(1) says an IRS employee may not contact anyone other than the taxpayer about the determination or collection of the taxpayer's liability unless the contact happens during a period, no longer than one year, specified in a notice that tells the taxpayer such contacts are intended. Unless the IRS provides otherwise, that notice must be given at least 45 days before the period begins.

Section 7602(c)(2) adds that the IRS must periodically give the taxpayer a record of the persons it contacted, and must provide that record on request.

Section 7602(c)(3) lists exceptions. The notice rule does not apply to contacts you authorized, to situations where the IRS determines for good cause that notice would jeopardize collection or may involve reprisal, or to pending criminal investigations.

How the IRS Applies It in TFRP Cases

IRM 5.7.4.2.5 translates the statute into the Revenue Officer's checklist.

Letter 3164-A goes to everyone under investigation. Before third-party contacts, every potentially responsible person should receive Letter 3164-A, Third Party Contact, by personal delivery or mail, as soon as they are identified and it is determined that a third-party contact will be needed.

Then the IRS waits. The 45-day period has to run before the contacts begin. The IRM's own example: the Revenue Officer delivers Letter 3164-A, lets the 45-day period expire, and only then prepares the bank summons.

You can waive the wait, narrowly. The Revenue Officer may ask you to sign Form 12180, Third Party Contact Authorization Form. The IRM says the authorization applies only to the third parties listed on the form and only waives the notice period for the person who signed it. If the Revenue Officer plans to summons a bank, the bank's full name, address and phone number must be on the form.

Learning names during your interview is not a third-party contact. The IRM says completing a Form 4180 interview is not a third-party contact with respect to people identified for the first time during the interview. But the Revenue Officer should refrain from asking you probing questions about a newly identified person, and must send that person Letter 3164-A and wait out the 45 days before contacting third parties to investigate them.

Witnesses: Bookkeepers, Controllers, Former Employees

The IRS values people who saw the money move but did not control it. IRM 5.17.7.2.5 says interviews of non-responsible employees who know the business and its decision-making process may be extremely helpful in determining who is both responsible and willful.

When a witness cannot be interviewed, IRM 5.7.4.2.5 directs the Revenue Officer to send Form 4181, Questionnaire Relating to Federal Trust Fund Tax Matters of Employer. If that witness later becomes a potentially responsible person, the IRS records a personal interview on Form 4180.

Think about who your witnesses are before the IRS does. Your former bookkeeper's memory of who told her not to make the deposit can decide your case. If the bookkeeper was taking direction from someone else, that helps you. If she was taking direction from you, it does not. Either way, you want to know first. Our guide to non-owner employees and bookkeepers explains how the IRS evaluates people in that seat.

Bank Summonses and Your Right to Quash

For bank records, IRM 5.7.4.2.7 directs Revenue Officers to use Form 6639, Financial Records Summons. It also says Revenue Officers should not use the general summons form, Form 2039, to summons a third-party recordkeeper like a bank for TFRP documents, and that the summons notice must be issued to all named parties, including the business, to comply with IRC 7609(a).

IRC 7609 is where your rights live.

• Notice. Under section 7609(a)(1), when a summons requires production of records relating to a person identified in the summons other than the person summoned, notice must be given to the identified person within 3 days of service and no later than the 23rd day before the date fixed for examining the records. The notice must include a copy of the summons and an explanation of the right to bring a proceeding to quash.
• Quash. Under section 7609(b)(2), anyone entitled to notice may begin a proceeding to quash no later than the 20th day after the notice is given. Within that same 20 days, the petitioner must mail a copy of the petition by registered or certified mail to the person summoned and to the IRS office identified in the notice.
• The records wait. Under section 7609(d), records may not be examined before the close of the 23rd day after notice, and if a timely quash proceeding is properly begun, only by court order or the petitioner's consent.
• Venue. Section 7609(h) gives jurisdiction to the federal district court for the district where the person summoned resides or is found.

There is a trade-off. Under section 7609(e)(1), if the person whose liability is being investigated petitions to quash, the assessment statute of limitations under section 6501 is suspended while the enforcement proceeding is pending. In a TFRP case where the assessment deadline is close, that can matter a great deal. Our guide to TFRP assessment deadlines explains why.

Keep the notice copies you receive. If the Revenue Officer skipped Letter 3164-A or the required summons notice, that procedural problem belongs in your protest and, later, in any refund claim. IRM 5.7.7.5 tells the IRS reviewers handling TFRP refund claims to check whether third-party contact and summons notice rules under IRC 7602(c) and 7609(a) were followed.

The Tenth Circuit Wrinkle

IRM 5.7.4.2.7 flags a special rule for documents from financial institutions in the Tenth Circuit, referring Revenue Officers to IRM 25.5.1.3.1 for summons issues in Kansas, Oklahoma, Wyoming, Utah, Colorado and New Mexico. If your bank is there, ask how the IRS obtained the records.

What Your Contacts Can Tell You

Because the IRS must provide a record of persons contacted on request under section 7602(c)(2), you can ask who the Revenue Officer has talked to. That list is a roadmap. It tells you which witnesses the IRS considers important and lets you prepare your response to what they likely said.

The IRS has a separate disclosure rule for payments. After assessment, IRC 6103(e)(9), as described in IRM 5.7.7.4.1, allows disclosure to each person assessed the TFRP of certain limited information about other persons assessed for the same underlying tax. That becomes important in contribution claims later.

A Practical Response Plan

1. When Letter 3164-A arrives, calendar 45 days. That is your window before the IRS starts talking to others.
2. Do not sign Form 12180 reflexively. Signing shortens your window for the listed parties. Sometimes that is fine. Decide on purpose.
3. Produce what you would rather the IRS see in context. If the business has the signature cards, board minutes and payment approvals, providing them with an explanation can be better than letting a summons deliver raw bank data.
4. Gather documents, not scripts. Collect emails and documents that show who directed payments. Do not coach anyone. The IRM requires Revenue Officers to thoroughly question and verify any defense.
5. Watch for 7609 notices. Twenty days goes fast. Decide whether a quash petition makes sense, knowing it suspends the assessment statute.

The firm's main site explains more about how payroll tax investigations are handled from start to finish.

The IRS has to tell you before it starts asking around. That notice is not a formality. It is your head start. If a Letter 3164-A or summons notice just landed, call (813) 229-7100. Let's talk.