Checklist · Tax

Facing an Employment Tax Assessment or a Responsible Person Interview: A Practical Checklist

26 U.S.C. § 7501

Type: Checklist
Jurisdiction: National
Date: 2024-12-30
Topic: Tax

This checklist covers the four postures an employment tax matter arrives in: keeping a compliant business compliant, stabilizing a business that has fallen behind, defending an individual against a personal trust fund assessment, and running diligence on a company being bought, financed, or divided. The compliance track covers deposit schedules, provider verification, classification documentation, and the information returns that preserve the safe harbor. The workout track is a thirty-day sequence built around stopping new accruals, filing every return, and designating every payment. The defense track walks the responsibility and willfulness elements period by period and prepares the interview that decides most cases. Each item names the authority and the document that proves it.

Facing an Employment Tax Assessment or a Responsible Person Interview: A Practical Checklist

Tax > Payroll Taxes, Trust Fund Recovery, and Employment Tax Enforcement | Published 30 December 2024 - Updated 26 January 2026 | UpLaw - uplaw.us

How to use this checklist

Track A keeps a compliant business compliant. Track B stabilizes a business that has fallen behind. Track C defends an individual. Track D is transactional diligence.

Run the first three items of Track B in every matter where any period is unpaid, before anything else. Stopping the accrual, filing the returns, and designating the payments are the only steps that get cheaper the earlier they happen.

Authorities: 26 U.S.C. § 7501 (trust fund); 26 U.S.C. § 3101, 26 U.S.C. § 3102, 26 U.S.C. § 3111, 26 U.S.C. § 3121 (FICA); 26 U.S.C. § 3301, 26 U.S.C. § 3306 (unemployment); 26 U.S.C. § 3401, 26 U.S.C. § 3402, 26 U.S.C. § 3403 (withholding); 26 U.S.C. § 3505 (third parties); 26 U.S.C. § 3509 (reduced rates); 26 U.S.C. § 6011 (returns); 26 U.S.C. § 6656 (deposit penalty); 26 U.S.C. § 6671, 26 U.S.C. § 6672 (trust fund penalty); 26 U.S.C. § 6303 (notice and demand); 26 U.S.C. § 6321, 26 U.S.C. § 6331 (lien and levy); 26 U.S.C. § 7436 (status review); 26 U.S.C. § 7201, 26 U.S.C. § 7202, 26 U.S.C. § 7206 (criminal); 26 U.S.C. § 6103 (confidentiality); 26 C.F.R. Part 31, 26 C.F.R. Part 301, 26 C.F.R. Part 1, 29 C.F.R. Part 541.

Track A: Compliance review

Deposits

[ ] Determine the current deposit schedule from the look-back period under 26 C.F.R. Part 31.
[ ] Confirm the schedule has not changed after growth, an acquisition, or a large bonus payment.
[ ] Confirm the next-day rule for large accumulations is understood by whoever runs payroll.
[ ] Confirm deposits are made by the required method.
[ ] Reconcile deposits to the quarterly return every quarter, not annually.

Verification

[ ] Obtain agency account transcripts for all open employment tax periods.
[ ] Reconcile the payroll provider's reports to the agency transcripts. Do not accept the provider's report as proof of remittance.
[ ] Confirm the provider agreement allocates responsibility and permits direct agency verification; note that 26 U.S.C. § 3505 does not shift the employer's liability.
[ ] Confirm the entity's own account, not a provider's aggregate account, shows the deposits.

Returns

[ ] Confirm all quarterly employment tax returns are filed under 26 U.S.C. § 6011.
[ ] Confirm the annual unemployment return is filed.
[ ] Reconcile annual wage statements and the transmittal to the quarterly returns.
[ ] Identify and resolve any mismatch before a notice issues.

Classification

[ ] List every worker treated as a non-employee.
[ ] For each, document the common-law analysis under Nationwide Mutual Insurance v. Darden: right to control manner and means, skill, instrumentalities, location, duration, assignment authority, discretion over hours, payment method, assistants, integration, benefits, and tax treatment.
[ ] Confirm consistent treatment of all workers in the same role. Inconsistency defeats the safe harbor.
[ ] Confirm all required information returns were filed for every non-employee. The safe harbor is lost without them.
[ ] Document the reasonable basis relied upon — judicial precedent, a prior audit, or long-standing industry practice.
[ ] Run the separate wage-hour exemption analysis under 29 C.F.R. Part 541; the answers differ.
[ ] Note that 26 U.S.C. § 3509 supplies reduced assessment rates only where the failure was not intentional and information returns were filed.

Authority controls

[ ] Limit check-signing authority to the smallest workable number of people.
[ ] Document in a board consent who has payment authority and its scope.
[ ] Revoke signature authority in writing when someone leaves the role, and update the bank card.
[ ] Confirm nobody has "convenience" authority they do not need.

Track B: The first thirty days of a workout

Days 1–3: Establish the numbers

[ ] Obtain agency transcripts for every employment tax period.
[ ] Build a period-by-period table: gross liability, deposits made, balance.
[ ] Split each period into the trust fund portion and the employer portion. The trust fund portion is income tax withholding plus the employee FICA share; the employer portion is the 26 U.S.C. § 3111 match and 26 U.S.C. § 3301 unemployment tax.
[ ] Compute the 26 U.S.C. § 6656 deposit penalty exposure and accrued interest.
[ ] Identify unfiled returns.

Days 1–5: Stop the bleeding

[ ] Determine whether the business can fund the current quarter's deposits. If it cannot, it must shrink or stop. Continuing to run payroll without depositing compounds personal exposure every pay period.
[ ] Restructure payroll so tax is impounded and remitted before net wages are released.
[ ] If a lender sweeps receipts, request in writing that tax deposits be carved out of the cash dominion arrangement, and preserve the request and any refusal.
[ ] Confirm no distributions, insider loans, or insider repayments are being made. Stop them immediately.

Days 3–10: File everything

[ ] File all unfiled returns even though payment cannot be made.
[ ] Confirm accurate reporting; do not understate to reduce the visible balance.
[ ] Identify who signs the returns going forward and confirm that person understands the exposure.

Days 5–15: Designate every payment

[ ] Adopt a written designation protocol: every voluntary payment is designated to the trust fund portion, oldest period first.
[ ] Put the designation on the transmittal and on the check or payment record.
[ ] Confirm the designation was honored on the next transcript.
[ ] Understand that levy proceeds and offsets are involuntary and cannot be designated.
[ ] If bankruptcy is possible, preserve the argument for trust-fund-first allocation under United States v. Energy Resources Co..

Days 10–20: Identify responsible persons

[ ] List everyone with check-signing authority during each period.
[ ] List everyone who decided which creditors were paid.
[ ] List everyone who signed employment tax returns.
[ ] Advise each that interests may diverge and that separate counsel may be required.
[ ] Do not permit joint representation without a genuine conflicts analysis and informed consent.

Days 15–30: Engage collection

[ ] Demonstrate current compliance before proposing anything; no alternative is available while new liabilities accrue.
[ ] Prepare complete financial information for the entity.
[ ] Evaluate an installment agreement under 26 U.S.C. § 6159.
[ ] Evaluate an offer in compromise under 26 U.S.C. § 7122, noting that a corporate offer does not resolve individual penalties.
[ ] Evaluate whether reorganization is the better path, given the allocation advantage.
[ ] Designate a single point of contact and instruct all staff that field visits and calls are routed to that person and counsel.

Track B: Red flags requiring immediate escalation

[ ] A second entity has been formed to continue the same business.
[ ] Funds have been used for personal expenses while trust fund taxes were unpaid.
[ ] Returns have been filed that understate liability.
[ ] Records have been altered or are missing.
[ ] Anyone has made false statements to a revenue officer.
[ ] Pyramiding has continued after a warning.

Any of these means the matter may be criminal under 26 U.S.C. § 7202, 26 U.S.C. § 7201, or 26 U.S.C. § 7206. Restructure the representation accordingly, and stop civil interviews until that assessment is made.

Track C: Defending an individual assessment

Step 1: Gather the record before speaking to anyone

[ ] Bank signature cards and account opening documents, with dates.
[ ] Check images and wire authorizations for the periods at issue.
[ ] Corporate minutes, consents, and resolutions granting or revoking financial authority.
[ ] Employment tax returns with signature blocks.
[ ] Loan documents, especially lockbox and cash-dominion provisions.
[ ] Emails and messages about which bills to pay.
[ ] Payroll provider agreements and reports.
[ ] General ledger disbursement detail for the periods at issue.

Step 2: Build the timeline, period by period

[ ] For each quarter, determine whether this person had authority to cause payment.
[ ] For each quarter, determine whether this person knew the taxes were unpaid.
[ ] Identify the date of knowledge precisely, distinguishing it from the date the problem began.
[ ] Identify every payment to another creditor after the date of knowledge, and its source of funds.
[ ] Note that liability is period-specific; narrowing periods is often worth more than contesting responsibility outright.

Step 3: Evaluate the elements

[ ] Responsibility factors: office, ownership, check authority and actual signing, hiring and firing, control of financial affairs, authority over creditor selection, return preparation or signature, bank account access.
[ ] Willfulness: did this person, knowing the tax was unpaid, cause or permit payment to another creditor from available funds? Reckless disregard also suffices.
[ ] Consider Slodov v. United States if the person assumed control after the withheld funds were dissipated — no liability for the pre-existing amount merely for failing to apply after-acquired funds, but full liability for periods during their tenure.
[ ] Compare the criminal willfulness standard of Cheek v. United States to confirm the civil standard is lower and that a good-faith belief the tax laws are invalid is no defense.

Step 4: Prepare for the interview

[ ] Review all records first. Never go in cold.
[ ] Prepare period-specific answers. Avoid global statements about authority.
[ ] Correct any incorrect factual premise in writing.
[ ] Attend with counsel; statements are usable in a criminal proceeding under the framework of 26 U.S.C. § 6103.
[ ] Do not permit other potential respondents to be interviewed under the same representation without a conflicts analysis.

Step 5: Contest before assessment

[ ] Exercise the pre-assessment administrative appeal. It is the cheapest and most effective step in the process and it disappears.
[ ] Submit the documentary record on authority and knowledge, organized by period.
[ ] Propose narrowed periods where full defense is unavailable.

Step 6: After assessment

[ ] Confirm notice and demand issued under 26 U.S.C. § 6303 and calendar all deadlines.
[ ] Evaluate the divisible-tax refund suit: pay the amount attributable to one employee for one quarter, file a claim, and sue on denial or after six months. Expect a government counterclaim for the balance.
[ ] Request a collection due process hearing under 26 U.S.C. § 6320 (lien) or 26 U.S.C. § 6330 (levy); check Boechler, P.C. v. Commissioner if a deadline has passed, since the petition deadline is not jurisdictional.
[ ] Evaluate an offer in compromise under 26 U.S.C. § 7122 based on individual collectibility.
[ ] Evaluate abatement of interest under 26 U.S.C. § 6404, noting Hinck v. United States on exclusive jurisdiction.
[ ] Evaluate costs under 26 U.S.C. § 7430 and any damages claim under 26 U.S.C. § 7433.
[ ] Evaluate contribution against other responsible persons; pursue only if they are solvent.
[ ] Note that the penalty is not dischargeable, per United States v. Sotelo.

Step 7: Lien and levy management

[ ] Confirm what property the lien reaches under 26 U.S.C. § 6321 — recall Drye v. United States (disclaimer ineffective), United States v. Craft (entireties interest reached), Aquilino v. United States (state law defines rights, federal law the consequence), and United States v. Bess (insurance cash value).
[ ] Review priority against other creditors under 26 U.S.C. § 6323 and release grounds under 26 U.S.C. § 6325.
[ ] For levies, confirm surrender obligations under 26 U.S.C. § 6332, exemptions under 26 U.S.C. § 6334, sale under 26 U.S.C. § 6335, redemption under 26 U.S.C. § 6337, and release under 26 U.S.C. § 6343.
[ ] If a forced sale of jointly held property is threatened, evaluate United States v. Rodgers on compensation to non-liable co-owners and the court's limited discretion.
[ ] Note United States v. National Bank of Commerce on levy against joint accounts and the provisional character of administrative levy.
[ ] Note 26 U.S.C. § 7421 restricts injunctions, with CIC Services, LLC v. IRS and Hibbs v. Winn marking the boundaries.

Track D: Transactional diligence

[ ] Pull agency account transcripts for all employment tax periods, not just recent ones.
[ ] Reconcile quarterly returns to annual wage statements.
[ ] Confirm the payroll provider actually remitted, from agency records rather than provider reports.
[ ] Ask directly whether any deposit has ever been missed, and when.
[ ] Obtain the list of workers treated as non-employees, and confirm information returns were filed.
[ ] Assess classification exposure under the Darden factors and the 26 U.S.C. § 3509 rate reduction.
[ ] Search for filed liens against the entity and against every officer and owner.
[ ] Confirm whether any responsible person has been interviewed or assessed.
[ ] For asset purchases, evaluate state successor liability and negotiate a holdback and clearance condition.
[ ] Price the exposure. It is personal to the sellers, follows them regardless of the purchase agreement, and kills deals when discovered at closing.
[ ] In bankruptcy contexts, note Begier v. Internal Revenue Service (no preference avoidance), United States v. Whiting Pools, Inc. (turnover of levied property), and United States v. Energy Resources Co. (trust-fund-first allocation).
[ ] In refund contexts, note United States v. Brockamp (no equitable tolling), Commissioner v. Lundy (look-back interaction), and United States v. Clintwood Elkhorn Mining Co. (refund procedures apply even to constitutional claims).

Interview preparation worksheet

Complete before any contact with a revenue officer. One row per quarter.

[ ] Quarter and year
[ ] Did this person hold an office? Which?
[ ] Ownership percentage, if any
[ ] On the bank signature card? From what date to what date?
[ ] Actually signed checks during this quarter? How many?
[ ] Could this person have caused a tax deposit without approval?
[ ] Who approved disbursements?
[ ] Did this person know the tax was unpaid during this quarter? Source of knowledge?
[ ] What was paid to other creditors during this quarter?
[ ] Were funds encumbered by a lender? Was a carve-out requested and refused?
[ ] Did this person sign the return for this quarter?

Answers to prepare in advance, verbatim:

[ ] "What were your duties?" — Answer the actual duties, not a job description.
[ ] "Could you sign checks?" — Answer with dates and limits.
[ ] "Who decided which bills got paid?" — Answer specifically, with evidence.
[ ] "When did you learn the taxes weren't paid?" — Answer with a date and a document.
[ ] "What did you do about it?" — Answer with actions and dates.
[ ] "Why were other creditors paid?" — This is the willfulness question. Do not improvise.

Distressed-business decision points

[ ] Can the business fund current deposits? If no, it must shrink or cease. Everything else follows from this answer.
[ ] Has anyone proposed forming a new entity to continue operations? Stop it — successor and transferee theories follow, and it supports willfulness and criminal referral.
[ ] Has anyone proposed a management or staffing company? It works only if the interposed entity is genuinely the employer under Nationwide Mutual Insurance v. Darden, files its own returns, and is capitalized.
[ ] Are insiders being repaid? Stop.
[ ] Are distributions being made? Stop.
[ ] Is an asset sale contemplated? Confirm the proceeds are designated to the trust fund portion.
[ ] Is bankruptcy under consideration? Model trust-fund-first allocation and its effect on individual exposure before filing.
[ ] Are wages being paid net while tax goes undeposited? Every such pay period adds personal exposure for every responsible person.

Closing verification

[ ] Every unfiled return has been filed.
[ ] Current deposits are being made without exception.
[ ] Every payment has a written trust fund designation.
[ ] Each potential responsible person has separate advice where interests diverge.
[ ] The authority-and-knowledge timeline exists in writing for each person.
[ ] The pre-assessment appeal deadline is calendared.
[ ] The client understands that the penalty is personal, survives the entity, and does not discharge.

Facing an Employment Tax Assessment or a Responsible Person Interview: A Practical Checklist

How to use this checklist

Track A: Compliance review

Track B: The first thirty days of a workout

Track B: Red flags requiring immediate escalation

Track C: Defending an individual assessment

Track D: Transactional diligence

Interview preparation worksheet

Distressed-business decision points

Closing verification

Related Documents