Toolkit · Tax

The Responsible Person Analysis, Deposit Compliance, and Trust Fund Interview Toolkit

26 U.S.C. § 7501

Type
Toolkit
Jurisdiction
National
Date
2024-12-23
Topic
Tax

This toolkit supplies the working documents an employment tax matter requires, each keyed to the authority it implements. Compliance materials include a deposit schedule determination worksheet, a provider remittance verification protocol, a worker classification memorandum built around the common-law factors and the consistent-treatment safe harbor, and a board resolution defining payment authority. Workout materials include the trust fund and employer split worksheet, a payment designation letter that should accompany every dollar paid, and a distressed-business decision memorandum. Defense materials include a period-by-period responsibility and knowledge matrix, an interview preparation script, a pre-assessment appeal protest outline, and a divisible-tax refund suit sequence. Each template states the failure it prevents.

The Responsible Person Analysis, Deposit Compliance, and Trust Fund Interview Toolkit

Tax > Payroll Taxes, Trust Fund Recovery, and Employment Tax Enforcement | Published 23 December 2024 - Updated 15 January 2026 | UpLaw - uplaw.us

Authority reference card

Question Authority
Why is withheld money held in trust? 26 U.S.C. § 7501
Who must withhold income tax? 26 U.S.C. § 3402
Who must collect employee FICA? 26 U.S.C. § 3102
Who is liable for withheld amounts? 26 U.S.C. § 3403
What is the employer's own FICA share? 26 U.S.C. § 3111
What is the employee tax? 26 U.S.C. § 3101
How are wages defined for FICA? 26 U.S.C. § 3121
What is federal unemployment tax? 26 U.S.C. § 3301, 26 U.S.C. § 3306
How are wages defined for withholding? 26 U.S.C. § 3401
What about third parties who fund payroll? 26 U.S.C. § 3505
What rates apply on reclassification? 26 U.S.C. § 3509
What returns are required? 26 U.S.C. § 6011
What is the deposit penalty? 26 U.S.C. § 6656
Who is a "person" for the penalty? 26 U.S.C. § 6671
What is the trust fund recovery penalty? 26 U.S.C. § 6672
What is notice and demand? 26 U.S.C. § 6303
What creates the lien? 26 U.S.C. § 6321
What authorizes levy? 26 U.S.C. § 6331
How is employment status litigated? 26 U.S.C. § 7436
What are the criminal provisions? 26 U.S.C. § 7201, 26 U.S.C. § 7202, 26 U.S.C. § 7206
What governs confidentiality? 26 U.S.C. § 6103
Where are the deposit rules? 26 C.F.R. Part 31
Where is the procedural framework? 26 C.F.R. Part 301
Where are the income tax regulations? 26 C.F.R. Part 1
Where are wage-hour exemptions? 29 C.F.R. Part 541

Case anchors. Slodov v. United States (post-dissipation control) · United States v. Sotelo (nondischargeable) · United States v. Energy Resources Co. (trust-fund-first allocation) · Begier v. Internal Revenue Service (no preference avoidance) · Nationwide Mutual Insurance v. Darden (employee test) · Cheek v. United States (criminal willfulness) · United States v. National Bank of Commerce, Drye v. United States, United States v. Craft, United States v. Rodgers, United States v. Bess, Aquilino v. United States, United States v. Whiting Pools, Inc. (lien and levy) · Boechler, P.C. v. Commissioner, United States v. Brockamp, Commissioner v. Lundy, Hinck v. United States, United States v. Clintwood Elkhorn Mining Co., CIC Services, LLC v. IRS, Hibbs v. Winn (procedure).

Tool 1: Trust fund split worksheet

Complete before advising on anything. One row per quarter.

Quarter Total liability Income tax withheld Employee FICA Trust fund subtotal Employer FICA (26 U.S.C. § 3111) FUTA (26 U.S.C. § 3301) Employer subtotal Deposits made Balance 26 U.S.C. § 6656 penalty Interest

Why this comes first. The trust fund subtotal is the number that follows individuals personally under 26 U.S.C. § 6672. Every strategic decision — which dollars to pay, whether to reorganize, whether an offer helps, whether to fight responsibility — depends on it. A practitioner who has not computed this split cannot give advice.

Tool 2: Payment designation letter

Send with every voluntary payment. Put the same language on the payment record itself.

[Date] Internal Revenue Service — [Office / Revenue Officer] Re: [Taxpayer], EIN [__] — Designation of Voluntary Payment

Enclosed is a voluntary payment of $[amount] on behalf of [Taxpayer].

[Taxpayer] hereby designates this payment, in full, to the trust fund portion of the employment tax liability for the quarter ended [earliest open quarter], and to the extent it exceeds that quarter's trust fund balance, to the trust fund portion of successive quarters in chronological order.

This payment is voluntary. [Taxpayer] requests written confirmation that the designation has been applied as directed and that the account transcript reflects it.

What this prevents. Undesignated payments are applied in the government's best interest — generally to the employer portion first — leaving the personal exposure of every responsible person untouched while the client believes the problem is shrinking. This one-paragraph letter is the cheapest money any adviser ever saves a client.

Verification step. Pull the transcript after the next cycle and confirm the application. If it was misapplied, request correction in writing immediately, attaching this letter.

Involuntary payments — levy proceeds, refund offsets, and payments compelled by court order — cannot be designated. Where a reorganization is available, preserve the argument for trust-fund-first allocation under United States v. Energy Resources Co..

Tool 3: Deposit schedule determination worksheet

Item Entry
Look-back period (four quarters)
Total employment tax liability reported in look-back
Resulting schedule (monthly / semiweekly) under 26 C.F.R. Part 31
Effective date of schedule
Next-day rule threshold understood by payroll staff?
Any one-time payment (bonus, settlement, equity vest) that could trigger next-day?
Deposit method confirmed
Person responsible for making deposits (named)
Backup person (named)
Date of last reconciliation to agency transcript

Annual trigger. Re-run this worksheet every year and after any acquisition, headcount change of consequence, or large one-time compensation event. Schedule changes are the most common origin of a first missed deposit.

Tool 4: Provider remittance verification protocol

The rule: a payroll provider's report is evidence that the provider intended to remit. It is not evidence that the government received the money. 26 U.S.C. § 3505 addresses third-party liability but does not relieve the employer, and 26 U.S.C. § 3403 leaves the employer liable regardless.

Quarterly steps:

  1. Obtain the agency account transcript for the entity's own EIN.
  2. Compare deposits shown on the transcript to the provider's report, deposit by deposit.
  3. Confirm the quarterly return was filed and matches.
  4. Confirm no notices are outstanding.
  5. Document the reconciliation with the date and the person who performed it.

Contract provisions to insist on: direct agency verification rights; immediate notice of any missed deposit or notice received; an indemnity; and a requirement that the provider hold impounded funds in a segregated account. None of these shifts the liability, but all of them shorten the time to discovery.

Tool 5: Worker classification memorandum

Worker or class: ___ Role: ___ Date: ___ Prepared by: ___

1. Description of the engagement. Scope, duration, compensation structure, and how the work is actually performed.

2. Common-law factors — apply Nationwide Mutual Insurance v. Darden:

Factor Facts Points toward
Right to control manner and means employee / contractor
Skill required
Source of instrumentalities and tools
Location of the work
Duration of the relationship
Right to assign additional projects
Discretion over when and how long to work
Method of payment
Role in hiring and paying assistants
Whether the work is part of the regular business
Whether the hiring party is in business
Employee benefits provided
Tax treatment of the hired party

3. Consistency. Are all workers in this role treated the same way? If not, the safe harbor is unavailable. List any exceptions and the reason.

4. Information returns. Confirm that all required information returns have been filed for this worker and this class, for every year. The safe harbor and the 26 U.S.C. § 3509 rate reduction both depend on this.

5. Reasonable basis. Identify the basis relied upon — judicial precedent, a prior examination that did not challenge the treatment, or a long-standing recognized practice in a significant segment of the industry — and attach the support.

6. Wage-hour analysis. Separately assess exemption under 29 C.F.R. Part 541. Record the conclusion and note that it does not affect the tax analysis.

7. Conclusion and review date. State the classification, the confidence level, and the trigger for reconsideration.

8. If reclassification is contemplated. Assess prior-year exposure before changing anything; a prospective change can demonstrate inconsistency and undercut the safe harbor for prior periods. Consider 26 U.S.C. § 7436 as the forum for a determination.

Tool 6: Board resolution — payment authority

RESOLVED, that the following persons are authorized to sign checks and initiate electronic payments on behalf of the Company: [names and titles], subject to the limits stated below.

RESOLVED FURTHER, that authority to determine the order and priority of payments to creditors is vested solely in [name/title], and that no other person shall determine which obligations are paid.

RESOLVED FURTHER, that federal and state employment tax deposits shall be made when due without exception, that such deposits shall not be deferred to fund any other obligation, and that [name/title] is directed to report to the Board immediately upon any deposit not being made when due.

RESOLVED FURTHER, that any person whose authority under these resolutions terminates shall be removed from all bank signature cards within [3] business days, and the Secretary shall document the removal.

Why it matters both ways. For the company, it creates a control. For individuals, it is the documentary record of who had authority and who did not — which is precisely the evidence that decides a later 26 U.S.C. § 6672 assessment. Keep the superseded versions; the dates are the point.

Tool 7: Responsibility and knowledge matrix

One grid per person. Complete before any interview.

Quarter Officer / title Ownership % On signature card (dates) Checks actually signed Could cause a tax deposit unilaterally? Who approved disbursements Knew tax unpaid? Date and source of knowledge Payments to other creditors after that date Signed the return? Exposure: Y/N/partial

How to read it. Liability requires both responsibility and willfulness in the same quarter. A person with authority who did not know is not liable for that quarter. A person who knew but could not cause payment is not liable. Narrowing the exposed quarters is frequently worth more than a global argument.

The Slodov row. If the person assumed control after the withheld funds were already dissipated, add a row noting the date of assumption and the state of the accounts, and apply Slodov v. United States.

Tool 8: Interview preparation script

Ground rules for the client. Answer the question asked. Do not volunteer. Do not estimate when a document exists. Say "I would need to check the records" rather than guessing. Counsel attends.

The questions that will be asked, and how to prepare each:

Question Preparation
"Describe your duties." Actual duties in the periods at issue, not a résumé.
"Could you sign checks?" Dates on and off the card; any limits; who else.
"Did you sign checks?" Approximate count and typical purpose; produce examples.
"Who decided which bills were paid?" Name, with documentary support.
"Could you have paid the tax without permission?" The single most important answer. Be precise.
"When did you learn the taxes were unpaid?" A date and a document.
"What did you do?" Actions, dates, and to whom.
"Why were other creditors paid instead?" The willfulness question. Do not improvise.
"Did you sign the returns?" Yes or no, by quarter.
"Did you own stock?" Percentage and dates.

Written corrections. If the officer's premise is wrong — wrong dates, wrong role, wrong entity — correct it in a follow-up letter with documents attached. Oral corrections do not appear in the file.

Multiple respondents. Each person's best defense implicates the others. Confirm there is no conflict before representing more than one, and tell any client offered "the company lawyer" plainly why that may not serve them.

Tool 9: Pre-assessment appeal protest outline

  1. Identification. Taxpayer entity, EIN, periods, proposed penalty amount, and the individual protesting.
  2. Statement of position. Whether responsibility, willfulness, or both are contested, and for which periods.
  3. Facts. A chronological narrative with document citations: the individual's role, the scope and limits of authority, the date of knowledge, and conduct after that date.
  4. Responsibility analysis. Apply the factors, factor by factor, to this person in these periods. Do not argue generally.
  5. Willfulness analysis. Address knowledge and preference directly. If payments were made to others after knowledge, address the funds' encumbrance and any lender direction, with the written requests and refusals attached.
  6. Period narrowing. Identify quarters for which the elements are not met even if others are.
  7. Legal authority. Slodov v. United States where applicable; the responsibility factors; the willfulness standard.
  8. Relief requested. No assessment, or assessment limited to specified periods and amounts.
  9. Exhibits. Signature cards, resolutions, check images, loan documents, correspondence, return signature pages.

Why this matters. The pre-assessment appeal is decided by a function independent of collection, costs a fraction of litigation, and disappears once assessment occurs. Most people skip it, then spend far more on a refund suit that could have been avoided.

Tool 10: Divisible-tax refund suit sequence

  1. Compute the penalty attributable to a single employee for a single quarter.
  2. Pay that amount and designate it to that period.
  3. File a claim for refund stating the grounds fully; grounds not raised may be barred later.
  4. Wait for denial or six months, whichever comes first.
  5. File suit in district court or the Court of Federal Claims.
  6. Expect a counterclaim for the unpaid balance — the case resolves the entire liability.
  7. Discovery targets: the interview memoranda, the officer's file, the government's responsibility determination for other persons, and the entity's disbursement records.
  8. Trial themes: authority limits, date of knowledge, encumbered funds, and period-specific analysis.

Related procedural authority. United States v. Brockamp (no equitable tolling of refund periods) · Commissioner v. Lundy (look-back interaction) · United States v. Clintwood Elkhorn Mining Co. (refund procedures apply even to constitutional claims) · Boechler, P.C. v. Commissioner (collection due process deadline not jurisdictional) · Hinck v. United States (exclusive jurisdiction over interest abatement).

Tool 11: Litigation hold — employment tax matter

To: [Custodians] Re: Preservation obligation — employment tax periods [] through []

Preserve all records relating to payroll, employment taxes, and disbursements, including:

  • Bank signature cards, account opening documents, and any card changes
  • Check images, wire authorizations, and bank statements
  • Payroll registers and provider reports
  • Employment tax returns and all supporting workpapers
  • Board minutes, consents, and resolutions concerning financial authority
  • Loan agreements, lockbox and cash-dominion provisions, and lender correspondence
  • Emails and messages concerning which obligations to pay
  • General ledger disbursement detail
  • Correspondence with any revenue officer

Suspend automatic deletion. Do not alter or reconstruct records. Route all agency contact through counsel. Note that 26 U.S.C. § 6103 governs the confidentiality of return information and that statements made in a civil context are available in a criminal proceeding under 26 U.S.C. § 7202, 26 U.S.C. § 7201, and 26 U.S.C. § 7206.

Tool 12: Distressed-business decision memorandum

  1. Can the business fund the current period's deposits? If no, the business must shrink or cease. State the analysis and the decision, with a date.
  2. Trust fund exposure by quarter. Attach Tool 1.
  3. Responsible persons identified. Attach Tool 7 for each.
  4. Designation protocol adopted? Attach Tool 2.
  5. New-entity proposals. Record any proposal to continue the business through a new entity and the advice given against it — successor and transferee theories, individual assessment for both entities, and evidence of willfulness.
  6. Insider payments. Confirm none are being made; record any that were, with dates.
  7. Lender arrangement. Has a carve-out for tax deposits been requested in writing? Attach the request and any refusal.
  8. Collection alternative. Installment agreement, offer in compromise, or reorganization, with the analysis of each and the effect on individual exposure.
  9. Bankruptcy modeling. If reorganization is considered, model trust-fund-first allocation under United States v. Energy Resources Co., preference immunity under Begier v. Internal Revenue Service, and nondischargeability for individuals under United States v. Sotelo.
  10. Criminal screen. Are there successive entities, false returns, diverted funds, or false statements? If so, restructure the representation before any further interview.

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