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Yes, if the conditions are right the IRS may forgo the collections of a Trust Fund recovery penalty.

If the IRS is considering a trust fund penalty against the taxpayer, IRS should be conducting a financial determination to find out whether there is collection potential for the trust fund recovery penalty.

Most IRS agents are too lazy to do so and just set up the trust fund recovery penalty.

If you are in a position that you cannot pay the tax because of your current financial condition bring this to the attention of the revenue officer and the manager working the case and give them your current financial status.

Here is the IRS code section that applies to this situation.

Per IRS IRM 5.7.5

A collectibility determination must be made in order to determine if the trust fund recovery penalty (TFRP) should be assessed.

The TFRP will normally not be assessed when:

1.There is no present or future collection potential

2. Neither the responsible person nor their assets/income sources can be located

IRS – IRS 5.7.5.2

Collectibility for Trust Fund Recovery Penalties

IRS should secure Form 433–A, Collection Information Statement (CIS) for Wage Earners and Self-Employed Individuals, in order to determine collectibility.

IRS will use Form 433-F, Collection Information Statement, may be used instead of Form 433-A if the individual is a wage earner and the potential TFRP liability is less than $100,000.

IRS Exception:

Although a financial statement is not required if one was obtained within the past twelve months, current research of the taxpayer’s information is still required.

If the taxpayer will not complete the CIS, determine if a summons can be issued (if there are other open existing assessments.

The taxpayer should give the IRS the collection financial statement to prove they are non-collectable.

As part of the collectibility investigation, current compliance on all 1040’s.

Verification of Ability to Pay

The following factors will be considered when determining collectibility of the TFRP:

1. Current financial condition

2. Involvement in a bankruptcy proceeding

3. Income history and future income potential

4. Asset potential (likelihood of increase in equity in assets and taxpayer’s potential to acquire assets in the future)

IRS will also research the taxpayer’s information by using the following internal and external sources, as well as any other applicable sources, to verify and determine collectibility:

1.Income,   Employment Records

2.Income and assets, e.g., income tax interest deduction for real property, IRA contributions, etc.

3.Motor Vehicles

4. Real Estate

5. Property Records

As a general rule the IRS does not request a full credit bureau check on the potentially responsible party if there is no assessment against the individual.

IRS Trust Fund Recovery Penalty – IRS Can Chose Not to Collect Tax