Many taxpayers believe
that if they operate as a Corporation, their personal assets are
shielded by the "corporate veil." In many instances, that is true.
However, Federal (and most state) payroll (and excise) taxes are an exception. If a Corporation does
not pay their income tax withholding and withheld Social Security
taxes, the IRS can - and almost always will - pursue its collection
directors, stockholders, key employees and anyone else who could
possibly be held liable for the Trust Fund Recovery Penalty (TFRP)
under the Internal Revenue Code Section 6672(a). Most states
has similar statutes - such as the EDD in California that will
assert a "personal liability" to an officer, shareholder or employee
deemed willful and responsible for the unpaid employment taxes.
Some years ago, the TFRP
was known as the "One Hundred Percent Penalty." This was so
named because one-hundred percent of the withheld income tax and
Social Security tax could be assessed against a responsible officer,
employee, etc. of the corporation.
Section 6672 of the
Internal Revenue Code says in part:
(a) GENERAL RULE
- Any person required to collect, truthfully account for, and
pay over any tax imposed by this title who willfully fails to
collect such tax, or truthfully account for and pay over such
tax, or willfully attempts in any manner to evade or defeat any
such tax or the payment thereof, shall, in addition to other
penalties provided by law, be liable to a penalty equal to the
total amount of the tax evaded, or not collected, or not
accounted for and paid over.
This statute gives the
IRS the ability to go collect withheld employment taxes where it is unable to collect from the corporate
Section 6672 applies to trust fund taxes
imposed by Section 7501 of the Internal Revenue Code. It does
NOT apply to the corporaton's portion of the social security taxes,
interest and late payment penalties.
The civil nature of the
penalty was codified in §6671(a) of the IRC that states, in
The penalties and
liabilities provided by this subchapter shall be paid upon
notice and demand by the secretary, and shall be assessed and
collected in the same manner as taxes...
Potentially, there is a potential
criminal aspect to trust fund taxes mentioned in section 7202 of the
required under this title to collect, account for, and pay over
any tax imposed by this title who willfully fails to collect or
truthfully account for and pay over such tax shall, in addition
to other penalties provided by law, be guilty of a felony and,
upon conviction thereof, shall be fined not more than $10,000,
or imprisoned not more than 5 years, or both, together with the
cost of prosecution.
Historically, the IRS
invoked the §7202 criminal statute in the vast majority of the §6672 cases.
Regardless, any corporation that has not filed all of its required
payroll returns should do so as quickly as possible. The
failure to file - together with a failure to collect and/or pay over
the required employment taxes - can be construed as sufficient
evidence of willful intent to raise the possibility that the IRS
will pursue criminal penalties.
WHO IS LIABLE FOR THE TRUST FUND
The IRS will usually
seek collection of unpaid trust fund taxes from
the corporate officers, directors or stockholders of the corporate
entity. Those individuals will most likely meet the two
requirements of section 6672 - "willfulness" and "responsibility."
The analysis required under Section 6672 involves:
determining whether the
person was a responsible person within the meaning of
whether the person's
failure to collect, account for, and pay over the trust fund taxes
was "willful" as defined by the courts.
The definition of a responsible
person is very broad and includes employees, shareholder, sureties,
lenders and others outside the formal corporate organization. The
responsible person is any person who can effectively control the
finances or determine which bills should or should not be paid and
Section 6671(b) of the
DEFINED - The term "person", as used in this subchapter,
includes an officer or employee of a corporation, or a member or
employee of a partnership who as such officer, employee, or
member is under a duty to perform the act in respect of which
the violation occurs.
The courts have
identified the responsible person quite broadly. Frequently,
the responsible person was
the one with the ability to sign checks on behalf of the corporation,
or to prevent a check's issuance or to control the disbursement of
payments. Godfrey v. U.S., 748 F2d 1568 (1984); Kalb v.
U.S., 505 F2d 506 (1974); Gold v. U.S., 671 F2d 492
(1981); Calderone v. U.S., 799 F2d 254 (1986).
The authority to sign
checks is only element that may establish responsibility. The courts
have considered other factors in asserting responsibility,
of the corporation's bylaws,
the identity of the officers, directors
and shareholders of the corporation,
the identity of the individual
who hired and fired employees, and
the identity of the individuals
who were in control of the financial affairs of the corporation.
Significant control over
the affairs of the corporation is another test courts have applied to
determine responsibility. Factors that can indicate significant control include:
holding corporate office,
authorization to write checks on corporate
control of corporate financial affairs,
corporate decision making,
holding an equity interest in the
possessing any other
significant authority such as the ability to hire and fire
Over the years, the
courts have come down on both sides of the issue. Some persons were
held responsible; while others were not. Frequently it depended on
the evidence presented in the particular case. On balance, however,
the courts have come down more frequently on holding a person
responsible than not. Below are synopses of a few cases that give
some indication of just how far some courts have been willing to go
to hold a person responsible.
An executive vice
president who handled day-to-day operations for a company and had
authority to collect and pay over the taxes, but who was ordered by
the president and chairman of the board not to remit taxes, was not
relieved of his status as a responsible person within the meaning of
§6672. Roth V. U.S., 779 F2d 1567 (1986).
An employee of a
corporation was found liable as a responsible person even though he
discussed delinquent payroll taxes with one of the owners and was
told it was none of his business and not to worry about it. The
Court reasoned that even though the employee was not an officer, he
was responsible for the ordinary day-to-day administrative operating
functions of the business with authority to determine which
creditors would be paid. Gephart v. U.S., 820 F2d 761 (1987).
An individual acting
through a power of attorney for a corporation that had failed to pay
withholding taxes was a responsible person even though the corporate
comptroller actually signed over checks and prepared all the
corporation's financial statements. Godfrey v. U.S. 748 F2d
1568 (1984), rev'g 3 Cl Ct 595 (1983).
Wife was sole
shareholder, chairman of the board, and vice president of the
corporation, and had check-signing authority. She held these
positions to enable the company to enter into contracts and obtain a
line of credit because she was not encumbered by her husband's lien.
She was not involved in day-to-day operation of the corporation and
delegated her authority to sign on its payroll account to her
husband. Nevertheless, the 4th Circuit held that she was liable for
trust fund recovery penalties for unpaid payroll taxes as a
"responsible person" because she possessed both legal and actual
authority over the business. Her husband could not avoid liability
for payroll taxes by making his wife the sole owner and officer, and
then having her delegate her authority to him. Johnson v. U.S.
, 112 AFTR 2d 2013-XXXX (4th Cir.).
The IRC does not define
willfulness for purposes of §6672(a). The
courts have defined the term through their decisions as the voluntary,
conscious and intentional act of preferring other creditors over the
The term willfully does
not require a criminal or other bad motive on the part of the
responsible person, but simply a voluntary, conscious or intentional
failure to collect, truthfully account for, and pay over taxes
withheld from the employees.
Willfulness does not
require a finding of attempt to defraud or to deprive the United
States of taxes. It requires only that the choice to pay funds to
other creditors instead of the Government be made voluntarily,
consciously, and intentionally.
Some courts have gone so
far as to state that failure to make the monthly deposits required
by Regulations is sufficient to show willfulness.
THIRD PARTY LIABILITY
Besides the Trust Fund
Recovery Penalty provision of §6672(a), liability may also be
imposed for non-payment of withholding taxes on parties under §3505
of the IRC. Unlike §6672(a) however, §3505 imposes liability not on
a responsible person of the corporation, but on third parties who
make either direct payment of wages to the taxpayer's employees or
who make advances to pay the taxpayer's employer. Examples of such
third parties include lenders, sureties or other third parties.
§3505 has two distinct
provisions: §3505(a) and §3505(b). §3505(a) imposes liability on
lenders, sureties or persons other than the employer who pay wages
directly to the taxpayer's employees.
§3505(a) states, in
PAYMENT BY THIRD PARTIES - if a lender, surety, or other
persons, who is not an employer under such sections with respect
to any employee or group of employees, pays wages directly to
such an employee or group of employees, employed by one or more
employers, or to an agent on behalf of such employee or
employees, such lender, surety, or the person shall be liable in
his own person and estate to the United States in a sum equal to
the taxes (together with interest) required to be deducted and
withheld from such wages by such employer.
The liability is equal
to the taxes (plus interest) that the employer is required to
withhold from such wages. The liability under §3505(a) is imposed
regardless of whether the payor knows that the employer does not
plan to pay the withheld taxes.
Section 3505(b) imposes liability on a lender, surety or person who
supplies funds to an employer for the specific purpose of paying
wages - if the payor has actual notice or knowledge that the
employer does not intend to, or will not be able to, make a timely
deposit of the withheld taxes.
§3505(b) states the
LIABILITY WHERE FUNDS ARE SUPPLIED - If a lender, surety, or
other person supplies funds to or for the account of an employer
for the specific purpose of paying wages of the employees of
such employer, with actual notice of knowledge (within the
meaning of section 6323(i)(1)) that such employer does not
intend to or will not be able to make timely payment or deposit
of the amounts of tax required by this subtitle to be deducted
and withheld by such employer from such wages, such lender,
surety, or other person shall be liable in his own person and
estate to the United States in a sum equal to the taxes
(together with interest) which are not paid over the United
States by such employer with respect to such wages. However, the
liability of such lender, surety, or other person shall be
limited to an amount equal to 25 percent of the amount so
supplied to or for the account of such employer for such
The payor is required to
exercise due diligence in determining the relevant facts before the
lack of actual notice of knowledge will constitute a defense. Under
§3505(b), the payor does not have an affirmative duty to investigate
the employer's intent. However, there is a duty to investigate when suspicious
In general, ordinary
working capital loans to the employer do not result in §3505(b)
liability even when the payor knows that some of the funds advanced
may be used to pay wages in the ordinary course of business. An
ordinary working capital loan is one which enables the employer to
meet current obligations as they arise.
The payor is not
required to ascertain how the funds will be used. Nevertheless, when
the loan payor has actual notice or knowledge that the proceeds of
the loan are to be specifically used to pay net wages, §3505(b) can
apply. Treasury Regulation §31.3505-1(b)(3).
It should also be noted
that if the payor exercises substantial control over the employer's
financial affairs and the payment of wages, a third basis for
liability may apply. The payer may be found to be the "employer" and
be held liable as such for all the employment taxes.
THE IRS PROCEDURE
IN ASSERTING THE TFRP
NOTE: FOR ANY TRUST FUND RECOVERY PENALTY THAT IS PROPOSED
AFTER MAY 20, 2005, PLEASE REFER TO THE NEW REVENUE PROCEDURE
THAT IS REPRINTED AT THE BOTTOM OF THIS PAGE.
The Revenue Officer
(RO) assigned the Corporate case, upon determining that the taxes
are not readily collectible from the Corporation, will begin
an investigation to obtain evidence to establish
willfulness and responsibility of potential individuals.
The RO will summons
bank records (such as cancelled checks, signature cards and
corporate resolutions), interview potentially liable persons and
secure corporate records, such as tax returns, articles of
incorporation, etc. This is discussed in Exhibit 5601-1 of the Internal Revenue Manual ("IRM").
When the RO makes a
decision to pursue assessment against a particular individual, the IRS will
mail a notice of proposed assessment (IRS Letter 1153) to the
individual, together with IRS Form 2751, Agreement to Assessment.
The individual has 30 days in which to file an appeal. If he
or she fails
to respond with a request for an Appeals hearing, the penalty will be
assessed without a hearing.
To file an appeal, the
individual must do so in writing (if the amount of the proposed tax
is more than $2,500) and state clearly his grounds for appeal. The
grounds must include factual and legal arguments.
An Appeals Officer will
hold a conference and consider the taxpayer's arguments.
If, after the conference, the taxpayer and the IRS cannot agree, the
taxpayer's only recourse is to wait for the IRS to assess the tax
against him, pay it (or a divisible portion of it), and file a claim
for a refund. If only a divisible portion of the tax is paid (such
as one employee's tax for one quarter of the corporation's unpaid
tax liability), the taxpayer has the additional requirement of
posting a bond. See IRC §6672(b) and IRM 5755.2
The claim for a refund
is filed on IRS Form 843. It must be filed within 30 days after
notice and demand for payment in order to legally preclude the IRS
from pursuing collection against the claimant. After 30 days, IRS'
collection efforts are discretionary. In any event, the claim must
be filed within 2 years after the tax (or divisible portion of it)
is paid. Thereafter, the statute for filing a claim for a refund
expires. See IRC §6511(a).
IRS has six months of
exclusive jurisdiction to act on the claim administratively.
Thereafter, the taxpayer has jurisdiction to sue the government in a
U.S. District Court or the Court of Claims in Washington, D.C. If
the IRS denies the claim within its exclusive six months or, in any
case, before the taxpayer brings a suit, the taxpayer must file a
suit within 30 days after the claim is denied. Failure to do so in
that time frame entails the risk of having IRS pursue enforced
collection. See IRC §6672(b)(2).
It should be noted that
the IRS has 3 years from the later of the succeeding April 15th or
from the date the return was filed to assess the Trust Fund Recovery
Penalty against the responsible person. See IRM Exhibit 5600-2. For
example, if the corporation files a 941 tax return for the period
ended 9/30/90 by 10/31/90, the IRS has until 4/15/94 to assess the
penalty against the responsible person for any unpaid trust fund
taxes still outstanding for that quarter.
This assessment statute
may be extended several ways:
a) by waiver, IRC
b) through bankruptcy,
IRC §6503(i); or
c) by absence from the
U.S., IRC §5503(c).
The assessment statute
is not extended by the target person filing an appeal, or by the
corporation filing bankruptcy.
There is no statute of
limitations for unsigned or fraudulent returns or those prepared by
the IRS under IRC §6020(b). See IRC §6501(c) and IRC §6501(b)(3).
Once the tax has been
assessed against the responsible person and any appeal and/or
litigation has been exhausted, he or she must deal with the Collection
Division of the IRS. Several relevant issues are worth noting:
(a) The IRS is not
required to pursue collection of the unpaid withholding taxes from
the corporation before attempting to assert TFRP against
responsible officials of the corporation. The IRS frequently pursues collection of
from the responsible officials even if the corporation is
functioning and even if the corporation is making payments on the
delinquent withholding taxes pursuant to a payment agreement with
b) The IRS can, and
frequently does, pursue collection of the Penalty against more than
one responsible person. However, IRS can retain only the
amount equal to the employer's trust fund taxes, together with
interest. See the IRS Policy Statement P-5-60.
c) If the Penalty is
fully paid by one responsible person, the assessments against any
others will not be abated until after the two year statute of
limitations for a refund has expired against the person that paid.
See IRM §5638.1(7)(b). In fact, collection procedures may be undertaken against a
second responsible person in some cases even if the first
responsible person has paid all of the Penalty. IRS asserts that it
may do so if the collection statute is about to expire against the
second persons and he refuses to sign a waiver. See IRM 5638.1(11)
d) No Federal common-law
right to indemnity or contribution for a tax liability assessed
against a responsible person exists under §6672.
e) The IRS is under no
obligation to credit the taxes collected by levy in any particular
manner to suit the corporation or to minimize the liability of the
responsible person. However, any voluntary payments made by
the corporation may be designated to the trust fund taxes. See
Internal Revenue Manual section 5634.12(2).
The first thing that
should be noted is that IRC §6672 taxes are generally not dischargeable
in bankruptcy. See §§523(a)(1)(A) and 507(a)(7)(C) of the Bankruptcy
Code. Thus any individual against whom the 100% Penalty has been
assessed has little or no hope of discharging it through bankruptcy.
Nor does the filing of
bankruptcy by the corporation stay the IRS from attempting to assess
the Penalty against the responsible person, Quattrone
Accountants, Inc. v. IRS, 895 F2d 921 (1990); American
Bicycle Association v. U.S., 90-1 USTC §50,104 (1990). The U.S.
Government has prevailed on this issue on jurisdictional grounds as
well as through §7421 of IRC (anti-injunction statute).
However, the Chapter 11
corporations may propose a plan that requires any payments of the
corporation to the IRS to be applied to the trust fund taxes first.
In U.S. V. Energy Resources Co. Inc., 110 S.Ct. 2139 (1990)
the court held that, even though the payments through Chapter 11
bankruptcy could not be considered voluntarily, the bankruptcy court
had authority under §105 of the Bankruptcy Code to designate payment
to the trust fund taxes if it felt that such designation would help
the debtor's reorganization efforts.
The Supreme Court
specifically declined to rule on the issue of whether such
designation could be made in a Chapter 7 case. The lower courts have
consistently held, however, that such designation is not allowed,
In re: F.A. Dellastatious, Inc., #83-10240-A (Bank Ct. E. Va. -
LIMITED LIABILITY COMPANIES
The IRS released a new
Revenue Ruling that addresses the issue of member liability for
unpaid employment taxes:
Rev Rul 2004-41, 2004-18 IRB : A
new revenue ruling has concluded that, absent fraudulent transfers
or other special circumstances, IRS may not collect an LLC's
employment taxes from its members if they are not liable for the
LLC's debts under state law.
CALIFORNIA EMPLOYMENT DEVELOPMENT
operating in California, the EDD has a similar provision to the TFRP
of the IRS. This process is referenced in the EDD Information
Sheet as "Personal Income Tax Adjustment."
The EDD does have a
procedure whereby an assessment can be reduced through the filing of
a Form DE 938P. This can result in a downward adjustment of
the PIT (personal income tax) portion of the adjustment. The
Information Sheet available on the EDD web site provides a good
discussion of this form and the process.
IRS MEMO ON
DOCUMENTATION REQUIRED FOR SUPPORTING A TFRP CASE
Here is a
to a memorandum released in 2011 to IRS Field Revenue Officers
guiding them in the development of a trust fund recovery case.
Rev. Proc. 2005-34, 2005-24
IRB, 05/20/2005, IRC Sec(s).
This revenue procedure
sets forth updated procedures for appeals of proposed trust fund
recovery penalty assessments arising under section 6672 of the
Internal Revenue Code.
.01 Section 6672(a)
imposes a penalty against any person required to collect, truthfully
account for, and pay over any tax imposed by the Code who willfully
fails to collect, or truthfully account for and pay over the tax, or
who willfully attempts in any manner to evade or defeat the tax.
.02 Under section
6671(b), the term “person” includes an officer or employee of a
corporation or a member or employee of a partnership, who, as an
officer, employee, or member of the corporation or partnership, is
under a duty to perform the act in respect of which the violation
.03 Section 6672(b), as
amended by the Taxpayer Bill of Rights 2, Pub. L. No.104-168, 110
Stat. 1465 (TBOR 2), provides that the Internal Revenue Service is
required to send a notice of proposed assessment to any taxpayer
against whom it intends to assess a trust fund recovery penalty. In
this context, section 6672(b) uses the broader term “taxpayer”
because the notice of proposed assessment must be sent to taxpayers
who may not ultimately fit within the definition of “person” as set
forth in section 6671(b) and as used in , , sections 6672(a), (c),
(d) and (e).
.04 Rev. Proc. 84-78,
1984-2 C.B. 754, which sets forth procedures for appeal of the trust
fund recovery penalty, does not reflect the amendments made to
section 6672 by TBOR 2.
The procedures in this
revenue procedure apply to trust fund recovery penalty cases
relating to employment and excise taxes imposed under the Internal
Revenue Code, except when collection is in jeopardy.
See section 6672(c) for
procedures relating to a stay of collection if a bond is furnished.
See section 6672(d) for provisions regarding the right to
contribution if more than one person is liable for the trust fund
recovery penalty. See section 6672(e) for rules regarding the
exception for voluntary board members of tax-exempt organizations.
4. Procedure in Area Collection Divisions
.01 If the Service
determines that a taxpayer is liable for the trust fund recovery
penalty, the Service will propose the assessment of the penalty and
inform the taxpayer of the determination by notice. The notice of
proposed assessment will provide the taxpayer an opportunity to sign
a form agreeing to the proposed assessment or to dispute the
proposed assessment by appealing the proposed assessment within 60
days of the date on the notice (75 days if the notice is addressed
to the taxpayer outside of the United States) and requesting an
.02 The Service will
assess the penalty if the taxpayer fails to appeal the proposed
assessment within the period specified in Section 4.01 of this
revenue procedure and the Service has not received a signed
agreement from the taxpayer agreeing to the assessment. If the
taxpayer submits a timely appeal in response to the notice of
proposed assessment and requests that the case be referred to
Appeals, the case will be reviewed in the appropriate compliance
office to determine whether further action or development is
required before referring the case to Appeals.
5. Procedure for Appealing a Proposed
Assessment and Requesting an Appeals Conference
.01 Small Case Appeals. If the
proposed penalty assessment for any tax period is $25,000 or less,
the taxpayer may appeal the proposed assessment by completing and
submitting in writing two copies of a small case appeal request. The
request should be mailed to the attention of the IRS officer or
employee named on the notice of proposed assessment as the “Person
to Contact” at the address shown on the front of the notice. The
request must include the following:
(1) A copy of the
notice of proposed assessment or the date and number of the notice
and the taxpayer's name and social security number, along with any
information that will help the Service locate the taxpayer's file;
(2) A statement that
the taxpayer is requesting an Appeals conference; and
(3) A list of the
issues that the taxpayer is contesting and an explanation of the
basis for the taxpayer's disagreement. The explanation should
include the following:
(a) The taxpayer's
duties and responsibilities during the tax periods listed in the
notice of proposed assessment. In particular, the taxpayer
should describe whether the taxpayer had the duty and authority
to collect, account for, and pay over trust fund taxes; and
(b) If the taxpayer
contests the Service's calculation of the penalty, the taxpayer
should identify the dates and amounts of payments that the
taxpayer believes the Service failed to consider and/or any
computational errors made by the Service.
.02 Large Case
Appeals. If the proposed penalty for any tax period is more than
$25,000, the taxpayer may appeal the proposed assessment by
submitting a formal written protest. In addition to the items
required by section 5.01(1) and (2) of this revenue procedure, the
formal written protest must include the following:
- (1) The tax period(s) involved;
- (2) A list of the findings the
taxpayer is contesting;
- (3) A statement of facts that
describes the following:
- (a) The basis for the taxpayer's
disagreement with the proposed assessment, including specific
facts that support the taxpayer's arguments;
- (b) The taxpayer's duties and
responsibilities during the tax periods listed in the notice of
proposed assessment. In particular, the taxpayer should describe
whether the taxpayer had the duty and authority to collect,
account for, and pay trust fund taxes; and
- (c) If the taxpayer contests the
Service's calculation of the penalty, the dates and amounts of
payments that the taxpayer believes the Service failed to
consider and/or any computational errors made by the Service;
- (4) An explanation of any law or
other supporting authorities on which the taxpayer relies; and
- (5) The following signed declaration
under penalties of perjury that the statement of facts required by
section 5.02(3) is true:
“Under penalties of perjury, I declare
that I have examined the facts presented in this statement and any
accompanying information, and to the best of my knowledge and
belief, they are true, correct, and complete.”
.03 A taxpayer may contest all of the
periods listed in the notice in a single protest; however, if the
proposed penalty for any one of the periods is more than $25,000,
the taxpayer must submit a formal written protest described in
6. Representation at Conference
A taxpayer may represent
himself at an Appeals conference or be represented by someone who is
authorized to represent taxpayers under Treasury Circular 230,
Regulations Governing the Practice of Attorneys, Certified Public
Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers
before the Internal Revenue Service (31 C.F.R. Part 10). If an
authorized representative attends an Appeals conference without the
taxpayer, the representative must have filed a power of attorney,
see 26 C.F.R. §§ 601.501 through 601.509, which also will authorize
the representative to receive or inspect confidential tax
information. If a representative prepares and signs a request for
appeal or a written protest on behalf of the taxpayer, the
representative must submit a declaration stating whether he or she
knows personally that the facts stated in the protest and
accompanying documents are true and correct.
7. Extension of the Period
of Limitations for Assessment
If the notice of
proposed assessment is mailed or delivered before the period for
assessing the trust fund recovery penalty ends, the assessment
period will not end before the later of:
(1) The date that is
90 days after the Service mailed or delivered the notice of
proposed assessment; or
(2) If the taxpayer
has filed a timely appeal in response to the notice of proposed
assessment, the date that is 30 days after the Secretary makes a
final determination regarding the appeal.
8. Procedure in Area
Director's Office for Disposing of Claims
.01 If the Service has
assessed the trust fund recovery penalty because of the failure of
the taxpayer to respond to the notice of proposed assessment within
the 60-day period (or 75-day period, if applicable) or on the basis
of the decision of Appeals, the taxpayer generally must pay the
appropriate portion of the penalty and file a claim for refund in
order to pursue judicial review.
.02 Once an assessment
has been made, the Service generally will not consider any claim for
abatement unless the taxpayer establishes to the compliance area
director's satisfaction that unusual circumstances merit
consideration of such a claim. If the compliance area director
decides not to consider a taxpayer's abatement claim, the taxpayer
will be notified of that decision.
.03 Only Appeals may
consider a claim for abatement if the assessment was made on the
basis of a decision of Appeals. If the assessment was made based on
a decision of Appeals, the area director will forward the claim to
Appeals for consideration. The taxpayer will be notified if Appeals
decides not to consider a taxpayer's abatement claim.
9. Effect On Other Documents
Rev. Proc. 84-78 is superceded.
10. Effective Date
This revenue procedure is effective for
all trust fund recovery penalties proposed on or after May 20, 2005.
about filing suit in District Court.
The time frame (2 years)
within which a deemed responsible person has to file for judicial
review is strictly applied as evidenced in this recent court
BREWER v. U.S., Cite as 95 AFTR 2d 2005-1750, 03/08/2005 , Code
Sec(s) 6532; 7422; 6672
Larry C. BREWER, PLAINTIFF v. UNITED STATES OF
AMERICA; Anne Moore, Chapter 7 Trustee; and HMH Motor Service, Inc.,
||6532; 7422; 6672
||U.S. District Court, Southern District of Georgia,
||CIVIL ACTION NO. CV204-147,
||Earlier proceedings at (2005, DC GA) 95 AFTR 2d 2005-1609,
vacating (2005, DC GA) 95 AFTR 2d 2005-1264.
||Decision for Govt.
1. Refund actions—limitations periods on
suit—equitable tolling—100% penalty for failure to pay over trust
fund taxes. Bankrupt corp.'s pres.'s action for refund
of Code Sec. 6672 penalties was dismissed as untimely: taxpayer
failed to file suit within Code Sec. 6532 's strict 2-year period as
measured from date of IRS's disallowance notice mailing. And, Code
Sec. 6532 wasn't subject to equitable tolling, so facts that
taxpayer had made timely, intervening attempts to pursue judicial
remedies and had filed earlier, albeit defective, suit were
Reference(s): ¶ 65,325.01(75) ; ¶
65,325.04(35) ; ¶ 74,225.05(45) Code Sec. 6532 ; Code Sec. 7422 ;
Code Sec. 6672
In the United States District Court for the Southern
District of Georgia Brunswick Division,
Plaintiff, Larry C. Brewer, filed the
above-captioned case against Defendants, the United States of
America, Anne Moore, and HMH Motor Service, Inc. (“HMH”), claiming
that he is due a tax refund or abatement because he was not a
“responsible person” for the federal employment taxes due.
Presently before the Court are the United
States' motion to dismiss the com [pg.
2005-1751] plaint for lack of subject matter jurisdiction and
for failure to state a claim upon which relief can be granted, and
Brewer's motion to allow amendment to the pleadings. Because
Brewer's complaint is untimely, the Government's motion to dismiss
will be GRANTED. Because the proposed amendment would be futile if
allowed, Brewer's motion to allow amendment to the pleadings will be
DISMISSED as moot.
Here is another case
involving the issue of another individual also potentially being
liable for the trust fund taxes.
* * * * * * * * * * * *
* * * * * * * *
MCLAREN v. IRS APPEALS OFFICE, Cite as 100 AFTR 2d 2007-XXXX,
THOMAS McLAREN and RITA McLAREN, Plaintiffs, v. IRS APPEALS
OFFICE and MICHAEL JEKA, Defendants.
||IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MONTANA BUTTE DIVISION,
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MONTANA BUTTE DIVISION,
FINDINGS AND RECOMMENDATION OF U.S. MAGISTRATE JUDGE
Judge: Carolyn S. Ostby United States Magistrate
Plaintiffs Thomas McLaren (“Mr. McLaren”) and Rita McLaren (“Mrs.
McLaren”) (collectively “the McLarens”) initiated this action
against Defendants the Internal Revenue Service (“IRS”) and IRS
appeals officer Michael Jeka (collectively “Defendants”) on July 26,
2006.Cmplt. (Court's Doc. No. 1) at 1. The McLarens
challenge Defendants' determination of taxes due from Anaconda Ace
Hardware LLP, and assessed against Mr. McLaren by the IRS. Id.
The McLarens have attached to their Complaint as Exhibin 1 the IRS
“Notice of Determination Concerning Collection Action(s) Under
Section 6320 and/or 6330” and the IRS “Enclosure to Notice of
Determination” addressed to Mr. McLaren. Cmplt. at Ex. 1.
Before the Court is the United States' Motion to Dismiss (Court's
Doc. No. 16). Having reviewed the motion, Defendants' brief, and the
record, it is recommended that Defendants' motion be granted for the
reasons stated herein.
The McLarens allege in their Complaint, in relevant part, as
Mr. Jenka (sic) of the IRS Appeals office made a determination
involving our due taxes from Anaconda Ace Hardware LLP - We
believe that we are not responsible for the full amount because
of our partnership. Another partner should share in the notal
amount owed but was dismissed by Mr. Jenka (sic) of
responsibility for the taxes.
The relief we seek is that Mr. John Corrigan be added to the
owed taxes and that the amount be reduced and/or the penalties
reduced so we can afford to make payments or restitution.
Cmplt. at ¶¶ III and IV.
On July 16, 2007, Defendants filed their Motion to Dismiss. They
advance three primary arguments in support of their motion.Memorandum
in Support of United States' Motion to Dismiss (“Defts' Br.”) at 1–2
First, Defendants argue that the Court lacks subject matter
jurisdiction over Mrs. McLaren's claims because the outstanding tax
liability is Mr. McLaren's. Thus, Defendants argue, Mrs. McLaren
lacks standing, the Court lacks subject matter jurisdiction over her
claims, and dismissal of her claims is appropriate under Rule
12(b)(1), Fed. R. Civ. P. 1 Id. at
Second, Defendants argue that the McLarens failed to serve the
United States within 120 days of filing the complaint as required by
Rule 4(m). 2 Thus, Defendants argue,
dismissal is appropriate under Rule 12(b)(5) for insufficiency of
service of process. Id. at 2.
Third, Defendants argue that the McLarens have failed to state a
claim upon which relief can be granted. Thus, they argue, Rule
12(b)(6) mandates dismissal. Id. at 1, 8–13.
The McLarens failed to respond to Defendants' motion to dismiss.
The Court has considered the record and the arguments presented.
Having done so, the Court concludes that the motion to dismiss
should be granted for two reasons.
First, under the Local Rules of this Court, the McLarens' failure
to respond is a concession that the motion is well-taken. Rule
7.1(i) of the Local Rules of Procedure of the United States District
Court for the District of Montana provides that the “[f]ailure to
file a brief by the adverse party shall be deemed an admission that
the motion is well taken.” The McLarens' failure to respond to
Defendants' motion indicates that they do not contest the motion and
concede that it should be granted.
Second, the Court concludes that the McLarens' Complaint fails to
state a claim upon which relief can be granted. Thus, the Court
recommends that the Complaint be dismissed under Rule 12(b)(6).
Under Rule 12(b)(6), a reviewing court ““must construe the
complaint in the light most favorable to the plaintiff and must
accept all well-pleaded factual allegations as true.”” Syverson v.
Int'l Bus. Machines Corp., 472 F.3d 1072, 1075 (9th Cir.
2007) (quoting Shwarz v. United States, 234 F.3d 428, 435 (9th
Cir. 2000)). Dismissal is proper only when there is no cognizable
legal theory or an absence of sufficient facts alleged to support a
cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901
F.2d 696, 699 (9th Cir. 1990).
In the case at hand, the IRS assessed Mr. McLaren with taxes
under 26 U.S.C. § 6672(a). Cmplt. at Ex. 1 (indicating “Tax
Type/Form Number” as “IRC [Internal Revenue Code] 6672 / TFRP”); 26
U.S.C. § 6672(a). The McLarens do not contest the assessed tax
liability. Rather, they claim only that they “are not responsible
for the full amount” and urge that “[a]nother partner should share
in the total amount owed ....” Cmplt. at ¶ III.
Even if the Court, construing the facts of the Complaint in the
light most favorable to the McLarens, determines that another person
also may be liable, as the McLarens contend, the McLarens still are
unable to prevail with this action under the law.
“Liability under Section 6672 is joint and several.” 14 Mertens
Law of Fed. Income Tax'n § 54:105 (Sept. 2007) (“Mertens”) (citing
Hartman v. U.S., 538 F.2d 1336, 1340 (8th Cir. 1976); see
also Schultz v. U.S., 918 F.2d 164, 167 (Fed. Cir. 1990); Brown v.
U.S., 591 F.2d 1136, 1142 (5th Cir. 1979); Savage v.
U.S., 2006 WL 449117 2 n.2 (E.D. Cal. 2006) (citing cases). Also,
the IRS is not required to seek payment from every responsible
person and may assess the tax against one responsible person and not
another. 14 Mertens § 54:105 (citing Howard v. U.S., 711 F.2d 729,
735 (5th Cir. 1983)). Thus, even if some other person may
share responsibility with Mr. McLaren for the tax that he admits is
owed, the IRS has no obligation to pursue that individual and, under
Section 6672, is permitted to pursue Mr. McLaren. Thus, he has
failed to state a claim herein upon which relief can be granted.
This, coupled with the fact that the McLarens did not respond to
Defendants' motion to dismiss, convinces the Court that dismissal is
appropriate. Because of this conclusion, the Court does not address
Defendants' other arguments in support of their motion to dismiss.
Based on the foregoing,
IT IS RECOMMENDED that the United States' Motion to Dismiss
(Court's Doc. No. 16) be GRANTED.
NOW, THEREFORE, IT IS ORDERED that the Clerk shall serve a copy
of the Findings and Recommendations of the United States Magistrate
Judge upon the parties. The parties are advised that pursuant to 28
U.S.C. § 636, any objections to these findings must be filed with
the Clerk of Court and copies served on opposing counsel within ten
(10) days after receipt hereof, or objection is waived.
DATED this 10th day of September, 2007.
Carolyn S. Ostby
United States Magistrate Judge
All references to Rules herein are to the Federal Rules of Civil
Procedure unless indicated otherwise.
Defendants also argue that the United States is the only proper
defendant for two reasons. First, they argue, the IRS is an agency
of the United States and, as such, it enjoys sovereign immunity.
Congress has not waived this immunity. Thus, they argue, the IRS is
not an entity subject to suit and the United States is properly
substituted in its place.
Second, Defendants argue that Jeka, an IRS Appeals Officer, is sued
herein in his official, and not individual, capacity. Thus,
Defendants argue, a claim against him is actually a claim against
the United States. Consequently, the United States is the only
proper defendant in this action. Id. at 3.
10/2008 Court Case:
recovery penalty. A
federal appeals court has ruled that the president of a day care
facility's board of directors was a responsible person liable for
the IRC §6672(a) trust fund penalty. Under IRC §6672(a), when an
employer fails to properly pay over its payroll taxes, the IRS can
seek to collect a penalty equal to 100% of the unpaid taxes from a
“responsible person,” i.e., a person who: (1) is responsible for
collecting, accounting for, and paying over payroll taxes; and (2)
willfully fails to perform this responsibility. In this ruling, the
president played an active role in various aspects of the day care
facility's operation and could have ensured that it paid its taxes,
but chose instead not to exert any authority over these business
affairs. Further, he didn't qualify for the protection from the
penalty given voluntary board members under IRC §6672(a) [Jefferson
v. U.S., CA 7, 102 AFTR 2d 2008-6572, 10/8/08].
Romano-Murphy, 152 TC
On remand from the Eleventh Circuit, the Tax Court has determined
that IRS's assessment of the trust fund recovery penalty was
invalid, rejecting the determination of the IRS Office of Appeals.
Based on the Eleventh Circuit's finding that under Code Sec.
6672(b)(3)(B) and the regs, IRS was required to issue a
pre-assessment determination of liability, the Tax Court concluded
that this requirement was one of the "requirements of applicable law
or administrative procedure", compliance with which must be verified
by the Office of Appeals in a Code Sec. 6330 collection due process
Code Sec. 6672(a) imposes a 100% penalty, commonly referred to as
the trust fund recovery penalty or the responsible person penalty,
on "responsible persons" if they willfully fail to pay over to IRS
the amount of taxes otherwise due. IRS must notify a taxpayer that
he will be subject to an assessment (pre-assessment notice) before
it can impose a penalty. (Code Sec. 6672(b)(1)) IRS must also wait
60 days from the date of the notice letter before making an
assessment. (Code Sec. 6672(b)(2))
There is a 3-year statute of limitations for making assessments
under Code Sec. 6672. The limitations period begins to run from the
date of the filing of the tax return or the due date of the return,
whichever is later. (Code Sec. 6501(a)) Code Sec. 6672(b) alters the
3-year period during which IRS is entitled to assess the trust fund
recovery penalty in two ways. First, under Code Sec. 6672(b)(3)(A),
the 3-year period is held open for 90 days after the mailing of the
preliminary penalty notice. Second, under Code Sec. 6672(b)(3)(B),
if the person makes a timely protest of the proposed assessment in
response to the preliminary penalty notice, the 3-year period is
held open until the date that is 30 days after IRS makes a final
administrative determination with respect to the protest. Thus,
where a taxpayer files a timely protest to IRS' pre-assessment
notice, IRS has an additional 30 days, from when it makes a "final
administrative determination" on the taxpayer's pre-assessment
protest, to assess the taxpayer.
Code Sec. 6330(a)(1) requires IRS to give a taxpayer written
notice when IRS intends to levy upon the taxpayer's property. The
notice must inform the taxpayer of the right to request a CDP
hearing in the Appeals Office. If a taxpayer makes a timely written
request and states the grounds for the requested hearing, he is
entitled to a CDP hearing conducted by an impartial officer from the
Appeals Office. (Code Sec. 6330(a)(3)(B)) The taxpayer may raise at
the hearing challenges to the existence or amount of the underlying
tax liability if he did not receive any statutory notice of
deficiency for such tax liability or did not otherwise have an
opportunity to dispute such tax liability. (Code Sec. 6330(c)(2)(B))
The Appeals Officer must verify that the requirements of any
applicable law or administrative procedure have been met in
processing the case.
In this case, the
taxpayer, Ms. Linda Romano-Murphy, was the chief operating officer
of NPRN, a business that was behind in paying its 2005 employment
taxes. After unsuccessfully seeking full payment from NPRN, IRS
sought to recover the remaining amount due from Romano-Murphy under
Code Sec. 6672(a).
To that end, IRS sent Romano-Murphy a Letter 1153 (pre-assessment
notice) informing her that, pursuant to Code Sec. 6672(a), she—as
the chief operating officer of NPRN—was personally responsible for
the company's unpaid trust fund taxes. It also informed her of her
right to protest the proposed assessment.
Romano filed a timely protest with IRS. Due to some unexplained
error, IRS did not forward Romano-Murphy's formal written protest to
its Appeals Office, which exclusively handles taxpayers'
pre-assessment protests under Code Sec. 6672(b). The Appeals Office,
therefore, never considered the protest, and Romano-Murphy was not
given a pre-assessment conference or a final administrative
determination as to her protest.
On October 15, 2007, having failed to address or resolve her
protest, IRS made an assessment against Romano-Murphy.
In August 2008, IRS served Romano-Murphy with notice of its
intent to levy to collect the penalty for NPRN's outstanding trust
fund taxes. In September 2008, Romano-Murphy filed a timely request
for a CDP hearing to contest her liability under Code Sec. 6672(a).
Romano-Murphy received a CDP hearing with the IRS Appeals Office
in February 2009. At the hearing, she disputed her liability under
Code Sec. 6672(a) for the assessed penalty. The Appeals Office noted
during the hearing that, although Romano-Murphy had filed a timely
pre-assessment protest, IRS had never given her the opportunity to
dispute her liability prior to making an assessment. Because the
proposed assessment had never been reviewed, the Appeals Office
conducted a post-assessment review of Romano-Murphy's challenges to
liability and to the amount of the penalty.
IRS Appeals concluded that she was liable for the outstanding
trust fund taxes. Romano-Murphy sought review of the Appeals
Office's determination in the Tax Court.
First Tax Court decision.
The Tax Court held that Romano-Murphy was liable under Code Sec.
6672(a) for the penalty. (Romano-Murphy, TC Memo 2012-330; see
Corporate officer hit with
responsible person penalty)
Romano-Murphy then filed a motion to vacate the Tax court's
order. She argued that collection of a tax liability, pursuant to
Code Sec. 6502, can only occur after an assessment has been made,
and the assessment in her case was invalid because IRS had failed to
give her a pre-assessment hearing and determination when she filed
her timely protest, which was her right by law. This procedural
error, Romano-Murphy argued, denied her due process and prejudiced
her in a number of ways. The Tax Court denied Romano-Murphy's motion
The Eleventh Circuit, vacating and remanding the Tax Court decision,
held that Romano-Murphy was entitled to a pre-assessment
determination of her Code Sec. 6672 liability. IRS therefore erred
in not providing her such a determination before making the
assessment and issuing its notice of intent to levy. The Court
disagreed with the Tax Court, which it said had, in effect,
concluded that taxpayers have no statutory right to a pre-assessment
hearing or to a final administrative determination of a
pre-assessment protest. Romano-Murphy v. Comm., (CA 11 3/7/2016) 117
AFTR 2d 2016-934, see IRS must provide taxpayers a pre-assessment
determination of responsible person penalty)
The Court cited several reasons for its conclusion. Although Code
Sec. 6672 does not contain a subsection concerning a pre-assessment
hearing or determination of liability, Code Sec. 6672(b)(3)(B) does
presuppose that there will be a pre-assessment determination at some
point if a taxpayer files a timely protest. It provides, in relevant
part, that "if there is a timely protest of the proposed
assessment", the 3-year statute of limitations for making an
assessment "shall not expire before..".
The Court said that IRS read Code Sec. 6672 as allowing it
unfettered discretion to resolve (or not resolve) timely
pre-assessment protests filed by taxpayers after they receive notice
of proposed assessments. IRS had said that the statute serves only
to give the taxpayer notice of her proposed liability and speaks
only about the possibility of an appeals process. In essence, the
Court said, IRS maintained that it may simply ignore, disregard, or
discard a taxpayer's timely protest to a Code Sec. 6672(b)
pre-assessment notice if it so chooses. The Court rejected this
argument, concluding that Code Sec. 6672(b)(3)(B) contemplates that
there will be a pre-assessment determination of liability and notice
thereof to the taxpayer if a timely protest has been filed.
Further, Reg § 301.7430-3(d) provides that, when a pre-assessment
protest is filed, the Appeals Office must make a determination of
Code Sec. 6672 tax liability and notify the taxpayer of that
determination in writing by following specific steps.
The Eleventh Circuit remanded the case to the Tax Court to
determine what action, if any, should be taken to remedy the IRS's
error in assessing the penalty against the taxpayer before making a
final administrative determination.
Tax Court decision on remand.
The Tax Court concluded that the no-assessment-before-determination
requirement identified by the Eleventh Circuit was one of the
"requirements of applicable law or administrative procedure",
compliance with which must be verified under Code Sec. 6330(c)(1) by
the Office of Appeals in an Code Sec. 6330 collection-review
The Tax Court reasoned that this requirement can be analogized to
the requirement in Code Sec. 6672(b)(3), identified by the Eleventh
Circuit, that IRS make a final administrative determination with
respect to a timely protest before assessing the trust fund recovery
penalty. As such, the requirement is akin to a statutory command.
More generally, the Tax Court reasoned that one of the requirements
that must be verified is that a "proper assessment" was made. Under
the Eleventh Circuit opinion, an assessment of a trust fund recovery
penalty without a final administrative determination with respect to
a timely protest is not a "proper assessment". The requirement that
a final administrative determination in response to a timely protest
precede the assessment of the trust fund recovery penalty, should be
considered a requirement of "any law and administrative procedure"
within the meaning of Code Sec. 6330(c)(2).
The Tax Court held that the assessment of the trust fund recovery
penalty was invalid and the Court did not sustain the determination
of the IRS Office of Appeals.
The Tax Court reasoned that the Eleventh Circuit opinion held
that the Code commands that a final administrative determination
with respect to a timely protest be made before assessment of the
trust fund recovery penalty. Under the rule set out in the Eleventh
Circuit, IRS handled Romano-Murphy's case contrary to the command of
Congress. In analogous circumstances, the Tax Court has held that
the assessment was invalid and that the Office of Appeals erred in
upholding the collection action. (Freije, (2005) 125 TC 14) The Tax
Court concluded that this was the appropriate disposition of this