- 5.1.14 Field Collection Techniques and Other Assignments
- 18.104.22.168 Overview
- 22.214.171.124.1 Performance Bond Provisions of the Miller Act
- 126.96.36.199.2 Procedures for Holding Surety Liable for Unpaid Withholding Taxes
- 188.8.131.52 Transferee Liability and Fraudulent Conveyances
- 184.108.40.206.1 Report of Investigation of Transferee Liability
- 220.127.116.11.2 Revenue Officer as Coordinator of the Collection Activity
- 18.104.22.168.3 Revenue Officer Transferee Procedures
- 22.214.171.124.4 Abatements and Refunds
- 126.96.36.199.5 Disposition of Bal Due Accounts Awaiting Abatement
- 188.8.131.52 Liability for Third Party Paying Wages or Supplying Funds for Payment of Taxes
Part 5. Collecting Process
Chapter 1. Field Collecting Procedures
Section 14. Field Collection Techniques and Other Assignments
This section contains procedures on:
Collection of Taxes from Public Works Projects
Transferee Liability and Fraudulent Conveyances
Liability for Third Party Wages or Supplying Funds for Payment of Taxes
Before a contract exceeding $100,000 is awarded for construction, alteration, or repair of any public building or public work of the United States, the prime contractor must furnish a performance bond for contracts guaranteeing that the work will be performed to completion. Refer to Section 3131 of Title 40 of the United States Code (Miller Act).
The provisions of the Miller Act apply only to taxes collected, deducted, or withheld from wages paid by the prime contractor and are not applicable to subcontractors.
The Revenue Officer will take the following actions for taxes owed:
If the prime contractor… Then … did work on a number of projects during the taxable period and there's no breakdown by contract a. Estimate taxes by determining the percentage of payroll for each contract in relation to the total payroll or based on available records and affidavits from officers or responsible persons having knowledge of the facts. b. Limit the liability of the surety to the amount collected, deducted, or withheld (or required to be) from wages paid by the contractor and interest, penalty or other additions thereto as may be applicable. c. Include the employee's portion of social security taxes as well as income tax. is still due funds under the contract a. Levy on the contract b. Consider giving notice to the surety for the purpose of holding the surety liable under the Miller Act because of: • Limited time in which notice can be given to the surety (within 90 days after the return is filed). • Results of the levy action will usually not be known within the period for giving notice to the surety. Has failed to pay and collection action against the contractor has not produced full payment of the tax liability To hold the surety liable the surety must receive notice within 90 days after the return is filed (or 180 days from the due date of return, whichever is sooner) identifying each period of liability.
When it is determined the surety is liable for unpaid withholding taxes:
Prepare a recommendation and include the following information:
Name, address, and TIN of taxpayer who is principal on the performance bond
Tax identification data (tax period, type, assessment date, amount, etc.)
Brief description of the project and location
Contract data (contract number, date, price, amount outstanding, contracting government agency, name and address of the contracting officer, etc.);
Name and address of surety or sureties, penal sum of bond and date bond executed
Proposed liability of surety (show each period separately);
Basis of computation, such as taxpayer's records, taxpayer’s statement, etc.
Date and status of levy when levy has been initiated by the revenue officer.
Summary of actions taken to collect the liability from the taxpayer.
Forward recommendation through the group manager to Advisory.
Continue collection action against the taxpayer.
Take the following actions when payment(s) are received after submission of the recommendation:
Apply first to the portion of the tax liabilities to which the Miller Act provisions are not applicable and to non-trust fund taxes, then to trust fund taxes subject to the Miller Act.
Promptly notify Advisory since this may affect the surety’s liability.
Advisory will open an NFOI on ICS no later than 7 calendar days and complete the review of the revenue officer’s recommendations no later than 14 calendar days of receipt in the group.
Advisory will expedite review of the revenue officer’s recommendations.
If recommendation is… Then Advisory will… Not approved Advise the revenue officer of the reason. Approved Prepare the notice to the surety in quadruplicate and: • Mail original by certified mail or deliver if necessary • Forward a copy to the taxpayer • Forward a copy to the revenue officer for notification of the action taken.
The revenue officer will take the following actions when the surety period to comply has expired:
Determine whether to recommend suit for failure to comply with the terms of the performance bond at least 4 months before the end of the one-year period from the date notice was given to the surety.
Include the basic data with the suit recommendation, together with copies (in triplicate) of the performance bond, the notice to the surety requesting payment and any other related documents.
Notify area counsel promptly of any credit or abatement to the tax that may affect the surety's liability after the recommendation has been referred for suit.
This Section deals with the ability of the United States to reach assets which may be or may have been disposed of by the taxpayer prior to assessment and which are or were not subject to the Federal tax lien.
Section 14 of IRM 5.17, Legal Reference Guide for Revenue Officers, contains detailed information on recognizing whether a fraudulent conveyance and transferee liability may exist and the recourse available to the United States in such situations.
There are three principal methods by which the United States may proceed where assets have been transferred in fraud of creditors.
Setting aside fraudulent conveyances.
Transferee liability by civil law suit.
Transferee liability by notice of deficiency.
Of the above methods, assessments which can be obtained through notice of deficiency should be looked to first.
The government's case will be based primarily on the facts developed and reported by the revenue officer. It is essential that the investigation be carefully and thoroughly conducted and the revenue officer’s report be as complete and detailed as possible.
The revenue officer will prepare Form 3031, Report of Investigation of Transferee Liability, in triplicate and complete the following:
Attach schedules and explanatory and descriptive statements necessary for a clear and complete presentation of the facts.
Attach documentary evidence, beginning with the year of transferor’s liability, of any nature which the revenue officer is able to secure in support of the determination of transferee liability.
Forward Form 3031 with attachments to the Group Manager.
The Group Manager will examine the report of investigation to ensure that it is complete and that a proper basis exists for assertion of the transferee liability.
Upon agreement with the recommendation, the Group Manager will:
Sign and forward original, with attachments, by memorandum to Planning and Special Programs in the Examination function.
Retain a copy.
Associate a copy with the transferor Bal Due case file.
The revenue officer who initiated the assertion of the transferee assessment, or is assigned multiple transferee assessments initiated by Examination or sustained by Appeals, will act as coordinator of the collection activity.
Multiple transferee assessments initiated by Examination or sustained by Appeals will be identified by the coordinating Revenue Officer with the notation "Transferee assessments exceed transferor liability" in the Bal Due case history.
The revenue officer acting as coordinator (transferor revenue officer) will:
Effect any required Bal Due account transfer.
Work with Counsel on the application of payments between the transferee and transferor.
The concept is similar to the cross referencing done with Trust Fund Recovery penalty collections. However, there are no cross-reference transactions codes to cross apply funds, so even though these accounts are handled by non-masterfile, payment applications are not correctly reflected. When receiving payments on an IRC 6901 assessment case, work with Advisory and Counsel on application and cross-referencing of those payments.
Notify the holders of other related Bal Due accounts of credits to be considered in further collection of the assessed liability upon receipt of the information.
Suspend collection in the event the total of payments received from all related Bal Due accounts equals the total assessed liability.
Work with Counsel to ensure that NFTL are released appropriately.
The revenue officer receiving a transferee assessment Bal Due account will proceed with all normal collection procedures.
IRM 184.108.40.206.4 provides information on preparation and approval of special condition NFTL.IRM 220.127.116.11.8 provides information on transferee liensIRM 18.104.22.168.12 provides information on IRC 6901 Transferee CDP notification
Notify the coordinating (transferor) revenue officer of the following:
Receipt of full payment of the assessed liability by memorandum, stating the date paid and the amount paid.
Summary of installment payments received, stating the dates and amounts paid.
A transcript of the account may be sent in lieu of a memorandum. This information will be furnished at 3-month intervals.
Copy of Form 53, Report of Currently Not Collectible Taxes, when a module(s) is put into currently not collectible status.
Claim for Refund or Refund Litigation.
When the total amount collected exceeds the amount of the transferor’s liability, the excess amount may be refunded provided a claim for refund is filed within the applicable statutory period.
If payment is made by personal check, the abatement of any balance(s) of assessments will be held in abeyance until such check has cleared the bank on which drawn.
No abatement will be administratively made in those cases which are not involved in court proceedings unless the statutory period in which a refund claim may be brought has expired as to the transferee.
Transferee Bal Due accounts which are not full paid may be abated because of full payment of a related Bal Due account.
The application of payments between the transferee and transferor is similar in concept to the cross referencing done with Trust Fund Recovery penalty collections. However, there are no cross-reference transactions codes to cross apply funds, so even though these accounts are handled by non-masterfile, payment applications are not correctly reflected. When receiving payments on an IRC 6901 assessment case, work with Advisory and Counsel on application and cross-referencing of those payments.
The Revenue Officer will:
Prepare Form 3870 to request the abatement
Input a TC 470 CC 90 to close the Revenue Officer's inventory control
Notate the ICS case history with a description of the Bal Due accounts that have been paid, including date(s) of payment as well as including the expiration date of the statutory period for filing claim for refund by the person who has paid the liability.
Transmit the closed physical file with the original approved Form 3870 to the Advisory Group Manager for the location where the controlling case is located
Establish an NFOI on ICS, using Action Code 175, Transferee Assessment, no later than 7 calendar days of group receipt of the recommendation for abatement, to monitor the account
TC 470 CC 90 will reverse systemically after a period of time. The Advisor must monitor for this occurrence and take steps to prevent re-issuance of a Bal Due module(s). The systemic reversal time period can be found in Document 6209 with the Section 11 TC 470 chart. IRM 5.1.15 contains additional information on adjustments.
Establish a follow-up on the module to review the account for a No Activity indicator until the two-year limitation expires and the accounts are abated or otherwise settled.
If… Then… claims for refund or abatement are filed by the transferee(s) within the two year statutory period suspend the liability on the transferor until the transferee's claim has been resolved, and the two year period for filing a refund suit has expired. a claim has not been filed and the period for filing one has expired request abatement of the related Bal Due accounts by forwarding the Form 3870 (which should have been prepared, approved, and provided with the Bal Due case file) to Case Processing.
Do not file a Notice of Federal Tax Lien when the accounts are awaiting abatement. When accounts are resolved take appropriate action on any existing NFTL.
IRC 3505(a) provides that:
Third parties who directly pay another’s payrolls can be held liable for the full amount of taxes required to be withheld but not paid over to the Government.
Employers are not relieved of their responsibility to file required returns and related documents (such as Forms W-2). See IRM 5.17 LRG for a discussion of this subject.
IRC 3505(b) deals only with persons who supply funds to an employer for the purpose of paying wages when two conditions exist.
The person must know that the funds advanced are to be used specifically for the payment of wages and,
The supplier of funds must have " actual notice or knowledge" at the time such funds are advanced that the employer does not intend to, or will not be able to make timely payment or deposit of the taxes required to be withheld.
Under IRC 3505(b) the liability of the third party may not exceed 25% of the amount supplied the employer for the specific purpose of paying wages. However, a supplier of funds is liable (subject to the 25% limitation) the same as a third party who pays wages directly. The 25% limitation includes any interest accrued on the unpaid taxes, therefore the Government cannot recover 25% and then recover interest on that 25%, but it can recover interest within the 25% limitation.
IRC 3505(c) provides that any amount paid to the United States pursuant to IRC 3505(a) and (b) shall be credited against the unpaid tax liability of the employer with respect to whose employees' wages such amounts are due.
However, employers are not relieved of their responsibility to file required returns and related documents (such as Forms W-2).
In order to collect from a third party under Section 3505 the United States must bring suit against the third party within ten years after the assessment of the tax against the employer.
In certain instances, revenue officers will be notified or otherwise informed that a third party is paying or supplying wages or has paid or supplied wages for an employer. Notification will usually be made by means of Form 4219, Statement of Liability of Lender, Surety, or Other Person for Withholding Taxes. Form 4219 may be received from the taxpayer or the third party. In other cases, Form 4219 will be sent directly to the service center. In such cases, Form 4219 will be received from the service center or from Advisory.
Take the appropriate action below to secure Form 4219 or Form 941.
IF... Then... another type of notice or information is received instead of Form 4219 a. Send three copies of Form 4219 to the third party with a pre-addressed return envelope. b. Upon receipt of Form 4219 (in duplicate) from the third party with voluntary payment: • Prepare Form 3244, Payment Posting Voucher and credit to the employer’s account. • Retain the duplicate copy of Form 4219, until the tax liability for the period(s) involved is fully paid or otherwise disposed of. applicable Form(s) 941 have not been filed • Secure them from the employer of record. • Attach the original Form 4219 to the 941 return. the employer of record will not file the applicable Form(s) 941 • prepare returns under authority of IRC 6020(b). • Consider jeopardy assessment (if the criteria for jeopardy are met) prior to forwarding the returns for assessment.
If the third party is accepting responsibility under IRC 3505(a) or IRC 3505(b), voluntary payments should equal the amount of withheld income tax and FICA required to be paid with Form 941. See Section 14.3(3) for the extent of the liability under IRC 3505(b).
The employer of record should be looked to for balances outstanding after the third party has voluntarily satisfied his/her responsibilities under 3505. This would only apply to section 3505(b) liability where the amount due by the taxpayer exceeds the 25% limitation.
When returns are filed without full payment, take the following actions:
Consider a jeopardy assessment if it meets the criteria for jeopardy.
If not, request a prompt assessment and upon receipt of the assessment notice, demand payment from the employer of record.
If payment... Then... is received close the "Section 3505" file. is not received first determine the collectibility of the account from the taxpayer/employer. of the balance cannot be collected from the taxpayer/employer ascertain the liability of the third party.
Where the facts indicate a third party is liable for all or a portion of the withheld employment taxes, but the third party neglects or refuses to voluntarily pay the amount of the liability under IRC 3505, the revenue officer must develop the facts to support a recommendation for civil suit and forward this recommendation to Advisory.
Facts which may support the liability of a third party under IRC 3505(a) include the following:
A written agreement between the employer of record and a third party which states that wages are to be paid directly by the third party.
Net wages paid by a third party as evidenced by:
Canceled checks of the third party
Bank records of the third party
Cash disbursements recorded in payroll records of the third party
Payroll records of the employer involved are maintained or controlled by the third party.
Forms 941, W-2 and W-3 have been prepared, signed, or filed by the third party.
Facts which support the liability of a third party under IRC 3505(b) include the following:
A written agreement between the employer of record and the third party that net wages will be supplied by the third party.
Records of the third party showing disbursements by cash or check to the employer of record in amounts approximate to the wages subsequently paid to employees.
Statements made by the employer and the third party indicate that the third party was aware of the amount of wages paid each payroll period.
Statements indicate that the parties understood that the third party would be supplying funds to the taxpayer to pay wages.
Payroll records of the employer involved are maintained or controlled by the third party.
Forms 941, W-2 and W-3 have been prepared, signed, or filed by the third party.
Advisory will review and process suits to establish the liability under IRC 3505 of third parties paying or supplying funds for wages as provided for in the Litigation and Judgement Handbook.
Periodically Advisory will receive from Compliance Services Collection Operations, Forms 4219, Statement of Liability of Lender, Surety or Other Person for Withholding Taxes, that were mailed directly to the Service Center.
If there is... Then... a case assigned to a revenue officer Advisory will forward the form to that revenue officer. no open case Advisory may, at their discretion, forward Form 4219 to the Territory Manager to be used as a CIP lead.