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Trust Fund Recovery Penalty
outline for this chapter

Amounts required by law to be withheld from certain payments (wages, back-up, various others) are impressed with trust in favor of the United States government under IRC 7501. When the payor fails to pay the required withholdings to the government the “Trust Fund Recovery Penalty” defined in IRC 6672 is the procedural device that is used to collect the amounts from other persons – usually the payor’s employees, officers, directors, partners and etc. Banks and other lenders that provide loans applied to make payroll are also subject to reach under another statute. Where lenders advance funds for payroll knowing the employer did not intend, or would not be able, to fulfill the employer’s obligation to collect, account for and pay over the required withholdings, those lenders and responsible officers can be required to pay the trust fund tax. IRC 3505. This chapter discusses the rules under 6672 and not 3505. The main principle is that ANYONE having power (and therefore the duty) to collect, truthfully account for, or direct payment of withholdings who WILLFULLY fails to do so can be required to pay the amount of those withholdings from the person's personal resources. A taxpayer's capacity to defend against assessment under IRC 6672 is wholly dependent upon a detailed development and presentation of evidence - a very time-consuming task in most cases. The central source of administrative materials governing the application of section 3505 is located at IRM 5.17.7.2 and the sub-parts that follow.

A July, 2008 Report published by GAO reveals the enormous revenue leak attributable to non-payment of employment taxes. The report may be accessed through this link. The report expresses the grave shortcomings the IRS had exhibited in regard to enforcement of the law concerning employment taxes. The report was not kind toward the IRS. COUNT on it: The IRS is doing something about the problem. Employment tax violations (including the trust fund portion) are being vigorously pursued by the government. To illustrate the gravity of the problem, consider the introductory remarks from the report:

"IRS records show that, as of September 30, 2007, over 1.6 million businesses owed over $58 billion in unpaid federal payroll taxes, including interest and penalties. Some of these businesses took advantage of the existing tax enforcement and administration system to avoid fulfilling or paying federal tax obligations—thus abusing the federal tax system. Over a quarter of payroll taxes are owed by businesses with more than 3 years (12 tax quarters) of unpaid payroll taxes. Some of these business owners repeatedly accumulated tax debt from multiple businesses. For example, IRS found over 1,500 individuals to be responsible for nonpayment of payroll taxes at three or more businesses, and 18 were responsible for not remitting payroll taxes for a dozen different businesses.


"Although IRS has powerful tools at its disposal to prevent the further accumulation of unpaid payroll taxes and to collect the taxes that are owed, IRS's current approach does not provide for their full, effective use. IRS's overall approach to collection focuses primarily on gaining voluntary compliance—even for egregious payroll tax offenders—a practice that can result in minimal or no actual collections for these offenders. Additionally, IRS has not always promptly filed liens against businesses to protect the government's interests and has not always taken timely action to hold responsible parties personally liable for unpaid payroll taxes."

I. Processes related to 6672 matters

A. Criminal statutes and the trust-fund duties:

IRC 7202 – willful failure to collect, account for and pay over ANY tax. The Criminal Investigation IRM 9.1.3.3.3 et seq summarizes the elements of the offense under §7202. See US Atty. Criminal Tax Manual discussing 7202, 7215 and IRC 7512. Sometimes attempts to reach government publications fails. An error message appears to indicate that the link appears broken, and even the cached pages on the internet will not resolve. At other times the government re-writes the URL's for documents. To locate this manual in such events try searching: "criminal tax manual" 2008 site:gov. Usually, it seems, the problem is temporary and likely due to site maintenance. The 2008 Criminal Tax Manual is a very helpful resource that should be consulted.

Section 7215 (another withholding-related criminal statute) and section 7512 work together. The provisions, copied directly from the U.S. Attorney Criminal Tax Manual, are as follows:

7215. Offenses with respect to collected taxes (7512 appears below)

"(a) Penalty.--Any person who fails to comply with any provision of section 7512(b) shall, in addition to any other penalties provided by law, be guilty of a misdemeanor, and, upon conviction thereof, shall be fined . . ., or imprisoned not more than one year, or both, together with the costs of prosecution. 

(b) Exceptions.--This section shall not apply--

(1) to any person, if such person shows that there was reasonable doubt as to (A) whether the law required collection of tax, or (B) who was required by law to collect tax, and

(2) to any person, if such person shows that the failure to comply with the provisions of section 7512(b) was due to circumstances beyond his control.

For purposes of paragraph (2), a lack of funds existing immediately after the payment of wages (whether or not created by the payment of such wages) shall not be considered to be circumstances beyond the control of a person."

7512. Separate accounting for certain collected taxes, etc.

"(a) General rule.--Whenever any person who is required to collect, account for, and pay over any tax imposed by subtitle C [relating to employment taxes], or chapter 33 [this chapter previously part of subtitle D now appears repealed]--

"(1) at the time and in the manner prescribed by law or regulations (A) fails to collect, truthfully account for, or pay over such tax, or (B) fails to make deposits, payments, or returns of such tax, and

"(2) is notified, by notice delivered in hand to such person, of any such failure,

then all the requirements of subsection (b) shall be complied with. In the case of a corporation, partnership, or trust, notice delivered in hand to an officer, partner, or trustee, shall, for purposes of this section, be deemed to be notice delivered in hand to such corporation, partnership, or trust and to all officers, partners, trustees, and employees thereof."

"(b) Requirements.-- Any person who is required to collect, account for, and pay over any tax imposed by subtitle C, or chapter 33, if notice has been delivered to such person in accordance with subsection (a), shall collect the taxes imposed by subtitle C, or chapter 33 which become collectible after delivery of such notice, shall (not later than the end of the second banking day after any amount of such taxes is collected) deposit such amount in a separate account in a bank (as defined in section 581), and shall keep the amount of such taxes in such account until payment over to the United States. Any such account shall be designated as a special fund in trust for the United States, payable to the United States by such person as trustee. [NOTE: By restricting application of the statute to taxes "which become collectible AFTER delivery of such notice" it is clear that no prosecution will lie for unpaid employent taxes assessed and due prior to any notice described in this statute. HOWEVER, when the duties have once been breached the IRS may serve this 7512(a) notice to prevent further breaches. Individuals served with such notices must diligently apply best efforts to assure no other violations occur while they remain "responsible persons."]

"(c) Relief from further compliance with subsection (b).--Whenever the Secretary is satisfied, with respect to any notification made under subsection (a), that all requirements of law and regulations with respect to the taxes imposed by subtitle C, or chapter 33, as the case may be, will henceforth be complied with, he may cancel such notification. Such cancellation shall take effect at such time as is specified in the notice of such cancellation."

7512 Notice and related processes: IRM 5.7.2

  • Letter 903 (or later replacement) will constitute the 7512(a) Notice.
  • Once such a notice is issued and personally served on taxpayer, special codes are input on the account. If any future violations occur the commencement of enforcement activity will be ACCELERATED. IRM 5.7.2.1(2).
  • On future infractions the Revenue Officer is instructed to take firmer actions. IRM 5.7.2.1.1
  • Future violations may result in referral to the Criminal Tax Division. The considerations and associated administrative guidelines are expressed throughout IRM 5.7.2.
  • Referral for civil enforcement is discussed at IRM 5.7.2.3.

B. OIC on Trust Fund:

Take special notice that IRS will not even consider an OIC from the employer to compromise the trust fund amount until §6672 assessments have been completed. IRM 5.8.4.22.1. This is another reason to not attempt to represent both the business as well as any individuals who might be subject to §6672. Where an OIC is submitted on behalf of the business the IRS is compelled to proceed against the indivuals as §6672 targets.

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C. Assessment process - employer's liability

1. Filed Forms 940, 941 and etc. report total taxes due and are immediately assessed. If the reported amount is not paid with the return IRS rapidly commences activity to collect. Just a few weeks after filing the written demand for full payment will arrive.

2. Unfiled returns: The "non-filer programs" will activate and processes described below will commence. Collections can prepare a “SFR” if necessary, and on that basis make the assessment of employment tax. IRM 5.1.11.6.7. If an "SFR" is the basis for the assessment, the government must follow the deficiency procedures. Also see IRM 5.1.11.6.7.3 for the discussion on appeal procedure.

D. Demand for payment of 941-taxes - the notices:

1. Where the required return-forms were filed and assessments were made from those returns, IRS will very, very quickly send notice and demand for payment of all unpaid amounts.

2. Succession of Notices: The notices listed in “Stage of the Case” will be mailed in prompt succession and will quickly culminate in Notice of Intent to Levy and Right to Due Process Hearing. Often Notice 503 will be skipped.

3. RO involvement: A revenue officer will very soon appear making demand for full payment and commencing the process of gathering all the financial data as outlined at III below.

4. REPEAT OFFENDERS: Employers who are pyramiding the taxes owed and are otherwise repeat-offenders are facing two very prompt actions. First, IRM 5.7.8 instructs Officers to secure immediate termination of the pyramiding. Every action necessary to bring the violator into compliance with accruing employment taxes will be taken. If any additional unpaid amount accrues IRM 5.7.8.4.1 provides the following: " Taxpayers who continue to pyramid liabilities after contact are considered "won't pay " taxpayers as indicated in IRM 5.10.1.6(2) and the Revenue Officer must proceed with enforced collection as necessary."

Because there is so often much urgency in these cases the government will serve the required Notice of Intent to Levy/Right to CDP-hearing before the financial analysis is complete and before any exploration of alternatives to levy has commenced. The notice will be served, at the latest, upon initial contact. At the same time the Officer will deliver Form 9297 stating specific actions required and setting absolute deadlines for those actions. IRM 5.7.8.4(12) states:

"Oftentimes, cases involving repeater and pyramiding taxpayers will require enforcement action. On initial contact, when a deadline is set for a specific action, the L-1058, Notice of Intent to Levy and Notice of Your Right to a Hearing will be issued with all required enclosures. Receipt of L-1058, during initial contact, may prompt the repeater taxpayer to comply."

E. No return filed - sequence:

1. A written request for filing will arrive. Failure to promptly file will typically bring a Revenue Officer to the premises. The Collection Division is authorized to prepare SFR’s for delinquent 940’s and 941’s. See IRM 5.1.11.6.7.

2. RO sets firm deadlines: The RO will deliver written instructions (and obtain a person’s signature acknowledging receipt of those instructions) stating firm deadlines for filing the delinquent return(s) and making full payment.

3. If the deadlines are met, the case is over. Delinquency penalties and interest will also be assessed. If the strict deadlines are not met the RO will commence the gathering and analysis of all of the payor’s financial data. Simultaneously, the RO will be examining the employer's data to locate assets that can be immediately levied. It is also likely the RO will simultaneously begin the process of identifying "responsible persons" for purposes of 6672 if it becomes necessary to pursue those persons. The RO will seek to complete Form 4180 discussed below. In the case of repeat offenders Officers are instructed to complete 4180-interviews during the very first contact. These cases are moved toward enforcement-stages with great speed. At the first moment that any employee learns the employment taxes were not paid they should immediately consult a professional long before the RO begins to conduct interviews and to develop the case. The employees who should find professional help are those who had anything at all to do with the processes of paying bills, who had check-writing authority, who were members of the Board and etc. It is critically important to prepare before interviews are conducted because too many times interviewees unwittingly provide incorrect or incomplete statements. Such statements will not provide the kind of accurate evidence the RO needs to identify targets correctly. As a result, persons who should have been eliminated as potential targets can instead face proposed TFRP assessment.

F. Failure to pay - sequence: {top}

1. Collect from employer? Not required for 6672.

All of the processes described in “IRS Financial Analysis, “Liens” and “Levy and Seizure” will mark the path the RO follows to pursue collection from the corporation. The 6672 process has a different focus - to collect from responsible individuals when the corporation is not going to be able to immediately address the debt. But IRS is not required to pursue the employer before applying 6672. See item II.F below.

2. Insufficient assets:

a. If application of the employer's liquid assets fails to satisfy the debt, the RO will analyze all data to make the selections listed in “IRS Financial Analysis.”

b. Seizures can be used, but in non-repeater situations the RO will often first explore use of an installment arrangement once cash resources are exhausted and there is an adequate income stream to pay the debt. "In-Business Trust Fund Express Agreements" provide a quick way out without any of the burdensome processes otherwise associated with tax debts. Repeat offenders will face immediate enforcement action and no installment arrangement of any kind will be considered by the government.

3. Installments and the "will-pay" taxpayer:

When it becomes clear the entire debt will not be promptly paid by absorbing TP’s cash and equity in assets the government might quickly move to consideration of an installment agreement or a PPIA. Immediately, the RO will become submerged in investigating and developing the Trust Fund Penalty case(s). It is in the taxpayer's best interest to cooperatively join in the collection-resolution process and to not become evasive. Taxpayers demonstrating that they are seriously addressing the resolution of the case tend to fall into the "Will-Pay" category. "Will-pay" taxpayers will not endure the seizure processes.

5.10.1.6 describes how "will pay" "won't pay" and "can't pay" factors must affect the decision about levies. This part of the manual provides "Seizures will not be conducted on taxpayers who 'will pay' or 'can't pay.' These categories include taxpayers who:

  • Do not agree with the assessment and are working with the Service to properly adjust their account
  • Will full pay their liability within a reasonable time frame
  • Require a reasonable period of time to sell an asset or secure a loan
  • Qualify for and submit an offer in compromise
  • Have no ability to make payments and have no distrainable assets (currently not collectible)
  • Request and qualify for an installment agreement."

There is a list of "won't pay" situations provided at IRM 5.10.1.6 (2).

4. OIC with employer does NOT reduce 6672-liability:

If the Service enters into a compromise with an employer for a portion of the trust fund tax liability, the remainder of the trust fund taxes may still be collected from a responsible person pursuant to Section 6672 of the Internal Revenue Code. IRM 5.8.4.22.1(2). IRS will not even investigate an OIC until 6672 assessments have been completed: IRM 5.8.4.22.1(1).

5. Investigate assessment under 6672:

This last step is discussed in the balance of this outline.

G. Designated Payments:

Personal liability under §6672 can be reduced when the employer makes specifically designated payments. See Rev. Proc. 2002-26. However, if the payments are those required by an In-Business Trust Fund installment agreement, the payments cannot be so designated. See examples at IRM 5.14.7.5. All payments made under installment agreements will be applied in the best interest of the government.

H. Exemption for volunteers:

IRC §6672(e) provides this exemption from liability:  “No penalty shall be imposed by subsection (a) on any unpaid, volunteer member of any board of trustees or directors of an organization exempt from tax under subtitle A if such member—

1. is solely serving in an honorary capacity,

2. does not participate in the day-to-day or financial operations of the organization, and

3. does not have actual knowledge of the failure on which such penalty is imposed.” [Comment: Some ponder why this provision was ever enacted. Under the law, no person occupying an honorary position without authority to direct payment of creditors is subject to 6672. But is seems important to note that the effect of the statute can be to deny automatic insulation from 6672 where the target-volunteer had personal knowledge of the organization’s failure to pay the trust fund. The provision is simply not required to exclude persons having no power to direct payment of creditors, and board members do not automatically possess such unilaterally exercisable power in many cases. E.g., see Godfrey, infra.]

II. “Responsible Person” in IRM 5.7.3.3 et seq. – an excellent summary of the law. {top}

A. Two Elements of §6672:

IRC §6672 is applicable when “responsible” persons have “willfully” failed to collect, truthfully account for and pay over required withholdings. The IRM’s provide comprehensive lists of the aspects that must be probed and the sources of evidence to be explored. IRM 5.7.3.3.1 provides a sound general overview of these matters:

1. a list of potentially responsible persons

2. lists revealing the kinds of duties, offices (status) and powers indicating a responsibility to assure taxes are paid

3. fundamental documentation to be reviewed to reveal the identity of potentially responsible persons

4. LLC factors indicating when 6672 is or is not necessary to impose personal liability

B. Anyone with power to control:

In general, responsible persons include ANYONE who has power to decide which creditors shall be paid. Thus, any lender, mortgage holder or contractor having power to cause payment to be made to any other payee in preference to the government is potentially a “responsible person.” E.g., Commonwealth National Bank v. U.S., 665 F.2d 743 (5th Cir. 1982) where bank and its chief executive officer were held to be responsible persons with respect to the borrower’s unpaid Trust Fund amounts. Power to determine which creditors are paid can subject those lenders to §6672 - completely apart from the reach of IRC §3505.

C. Indicators of Responsibility:

IRM 5.7.3.3.1.1 publishes the following discussion of the “Indicators of Responsibility.” The quoted language set out below reflects principles persistently expressed in the case law. (emphasis is supplied below)

1. "The full scope of authority and responsibility is contingent upon whether the person had the ability to exercise independent judgment with respect to the financial affairs of the business.

2. "If a person is an officer or owns stock in the corporation, this cannot be the sole basis for a responsibility determination.

3. "If a person has the authority to sign checks, the exercise of that authority does not, in and of itself, establish responsibility.

"NOTE: Signatory authority may be merely a convenience.

4. "Persons with ultimate authority over financial affairs may generally not avoid responsibility by delegating that authority to someone else. If a potentially responsible person asserts that the duty to pay taxes or otherwise handle the financial affairs of the business was delegated to an employee:

- Evaluate the facts and circumstances of the case

- Determine whether the delegation rendered the person (delegator) powerless to disburse funds or dictate fiscal policy

"NOTE: Delegation may be relevant when determining willfulness." (emphasis supplied)

D. Violate just one of the three duties:

IRM 5.17.7.1.2 in the Legal Reference Guide for Revenue Officers states “A responsible person may be held 100% liable if such person willfully fails to perform any one of the three duties listed in the statute: collecting, truthfully accounting for, and paying over such taxes. Slodov v. United States, 436 U.S. 238 (1978).”

E. Liability of non-owner Employees:

1. IRM 5.7.3.3.1.2 expresses guidance applicable to the process of identifying responsible persons. This is a valuable resource to representatives. It provides additional examples illustrating “responsibility” and some supporting case law citations.

2. Duty to disobey superiors:

Observe this specific statement provided at IRM 5.7.3.3.1.2(3): “Officers and higher level employees of a company who are non-owners may still be required to sacrifice their jobs (i.e., quit) to avoid being responsible for the TFRP, rather than obey the orders of an owner to pay other creditors but not to pay current federal trust fund taxes as they become due. See Brounstein v. United States, 979 F.2d 952, 956 (3rd Cir. 1992).”

F. Not required to collect from employer, others:

It is not required that an attempt to collect from the employer be made before proceeding to the TFRP. Hornsby v. Commissioner, 588 F.2d 952 (5th Cir. 1979); United States v. Huckabee, 783 F.2d 1546 (11th Cir. 1986). It is likewise not required that the IRS seek to collect from any other responsible party, though 6672(d) creates a right to seek proportional contribution from other responsible persons.

G. Bankruptcy cannot block 6672:

Because the 60-day notice required by IRC §6672 is not a statutory notice of deficiency under IRC §6213, bankruptcy cannot block the IRS from assessing under 6672. See 11 USC 362(a)(9).

III. How IRS Investigates the case: IRM 5.7.4 – “Investigating, Recommending TFRP.” {top}

A. Completing Form 4180: Protecting the client

The statements at IRM 5.7.4.2 et seq. reveal very important instructions concerning the investigative approach to conducting interviews. Too often witnesses make unnecessary and harmful misstatements when pressured to immediately respond to the RO's questions. Form 4180 is the pre-printed document RO’s use to conduct interviews to identify "targets" for the TFRP assessment. Representatives should be aware of the instructions given to RO’s concerning the 4180-process. Open this link to Form 4180. There is not sufficient space available on the Form to record the full and truthful responses in many interview situations. Sometimes, people facing such conditions will attempt to cooperate with the Form (and the RO) by "shrinking" responses to fit within the confines of the form. Observe the following language from IRM 5.7.4.2.1:

1. “Form 4180 is the form to be used for conducting TFRP interviews. It is intended to be used as the [contemporaneous] record of a personal interview with a potentially responsible person.

[Comment: That has special significance under the rules of evidence.] [During the initial contact, RO's always attempt to very quickly] . . . secure the form from all potentially responsible persons. If Form 4180 cannot be secured, document the case history with the reasons why it was not secured.”

[Comments: “Personal interview” appears in bold face print in the IRM. IRS is serious about infusing the process with the kinds of factors, pressures and responses that face-to-face meetings with the IRS produce in laymen. This form leaves very little room to answer many of the various probes. In fact, the form is designed to record conclusions and not factual underpinnings, it seems. In many instances the witness will not be able to explain job descriptions, limitations on authority, delegations, lack of awareness, complicated factual situations and the like. Prepare thoroughly before responding to the RO. Accuracy and completeness are critically important. Representatives might consider advising witnesses to NOT complete Form 4180 until they have adequately thought all the way through the facts. Consider explaining that to the RO and decline to answer questions until the entire factual situation has been brought clearly to the witness’ recollection.

[Comment: Where representative enters case AFTER 4180 was completed: Obtain the 4180 that was provided. As the evidence is gathered and facts learned, be absolutely sure to correct and/or augment the responses on the 4180.]

2. Inadequacy of 4180:

“The purpose of the personal interview and completion of Form 4180 is to secure direct, detailed information regarding the interviewee’s or other person's involvement in the business in order to determine if he or she meets the criteria for responsibility (IRM 5.7.3.3.1) and willfulness (IRM 5.7.3.3.2). The questions on the form are intended as a guide and are not all-inclusive; supplemental questions may be asked.”

[Comments: It is no secret. The RO will interview shareholders, directors, officers and employees with the intention of securing evidence sufficient to establish “responsibility” and “willfulness” against every potential target. And there is absolutely no way that “detailed information” can be placed on the form. Attachments are required in those instances where a full statement of many facts must be submitted by apparent targets able to present “exculpatory” statements.]

3. Prepare attachments - don't let the interview dictate content:

Do not give or mail the form to the potentially responsible person(s) or representative for completion by that person. It will be completed in person or over the phone.” (emphasis supplied)

[Comments: Study Form 4180 in light of the documentary evidence and the witness’ statements. Thoroughly probe the facts and the supporting documentary evidence. Probe the witness’ recollection. Prepare the statements to be attached to the Form 4180 when it is clear that correct responses can't be "shrunk" to fit within the confines of the spaces. Documentary evidence to be reviewed MUST include the very same items the RO will review.]

4. “Always request the presence of the potentially responsible person when conducting an interview with a representative having a power of attorney.”

[Comments: Though representatives might possess Form 2848, Power of Attorney, as the witness’ designated attorney-in-fact, the IRS is going to interview the witness when it bears the aroma of being a necessary interview. There is no way a representatives will usually succeed in interposing themselves between the target and the IRS agent. SUMMONS power will be applied if necessary. On the other hand, ANY evidence that suggests "responsibility" obtained from other sources and witnesses will be relied upon when the witness is not cooperating. IRS can quite simply propose to assess under 6672 and leave the person facing the necessity of rebutting and overcoming the proposal by reference to the evidence. It is always best to base conduct on the evidence and accept correct conclusions.]

5. “Enter ‘unknown’ in the appropriate block on the form if the person interviewed cannot answer a specific question.”

[Comments: As is done to prepare any witness to respond, this witness’ statements must honestly decline to answer until the witness has had opportunity to resort to whatever evidence might be required to fully and honestly respond.]

6. “Enter ‘not applicable’ in the appropriate block on the form if a question does not apply. If any information has already been completed on Form 433-B, Collection Information Statement for Businesses, the revenue officer can enter ‘See 433-B’ in the applicable blocks.”

[Comments: Form 433-B also discloses the identity of co-owners, shareholders, officers and etc. Sometimes employees honestly cannot distinguish between owners and bosses. Their recollections and knowledge should usually be explored before responding to the RO’s interview.]

7. “After the interview is completed, request the potentially responsible person or the authorized representative to sign Form 4180. The revenue officer will also sign the form.” [Comments: This is another reason to make sure that the witness is able to accurately and fully respond to the questions asked.]

8. Items 8 and 9 are omitted from this discussion.

B. Evidence Guide to RO:  {top}

IRM 5.7.4.2.4 is a valuable resource. RO’s SHOULD build these cases primarily from the documentary evidence generated in connection with the formation and operation of the entity. If the RO seems to be forming conclusions based on titles, job-descriptions, ownership and etc. representatives should determine whether the RO is complying with the requirements of the manual. IRM 5.7.4.2.4 enumerates the kinds of evidence that will (should) be obtained and analyzed by the RO. Persons representing witnesses and potential targets (especially those persons who only bear an appearance of “responsibility” and exculpatory evidence insulates them from 6672) should analyze and be familiar with the facts embedded within the same sources the RO is going to analyze.

1. “In the majority of cases, most of the evidence that can be secured to support recommendations of TFRP will be either corporate records or bank records.”

2. " The documentation, including bank records, will be requested from the corporation whenever possible. If the corporation does not provide the requested records, a summons will be served on either the corporation, the bank, or both to secure the required documents . . .” [Comments: Consult the “Summons Enforcement Manual.”]

3. “Photocopies of the documentation should be maintained in the TFRP case file as evidence to support the recommendation to assert the TFRP. Determine on a case by case basis the amount of documentation required to support the recommendation to assert the penalty. There must be sufficient documentation in the file to support each recommendation for assertion. Bank records and copies of the applicable tax returns will be secured on almost every case . . .” [Comments: Obtain the bank signature cards covering the relevant periods. Did the witness have signature authority? Sometimes witnesses have been added as “emergency” signatories and they do not remember the event. And even if they have signature authority during a relevant quarter, determine from the cancelled checks whether the witness ever signed anything. Even if the witness signed checks, the most critical exploration relates to the determination of whether the witness possessed that kind of decision-making control over application of the corporation’s resources described in the cases cited below. Mere authority to sign checks is not sufficient to establish responsibility. See cases below.]

4. “Corporate records that can be reviewed include:

a. "Articles of Incorporation

b. "Minute Books

c. "Forms 941 and 1120 or 1065

d. "Payroll records

e. "Any other records that may be relevant to determining the roles and responsibilities of individuals involved with the corporation.” [Comments: Minutes of meetings may be of critical importance to potential targets. When corporations start falling behind on these taxes there is often a history of financial struggle underlying the failure to pay taxes. Minutes must be studied to know what was discussed; whether the condition and the non-payment might have been actively concealed; whether the witness insisted upon paying the taxes as a director (apparent authority over others who can sign checks) but was out-voted, for example. The RO will sometimes study those minutes to know what was discussed and who was involved.]

5. “The corporate records will be reviewed to determine:

a. "Duties (and changes to duties) of officers, directors, etc.

b. "Appointments and resignations of officers, directors, etc.

c. "Responsibilities of individuals to file and pay tax returns

d. "Issuance of stock to officers

e. "Assets transferred to officers

f. "Loans made to officers

g. "Unreported payroll and other taxes

h. "Diversion of funds

i. "Borrowing of funds not used to pay taxes.” [Comments: If the records embrace evidence of such matters witness’ representatives must know about such things from the records. Also, be aware that in part the IRS will use the records to detect the identity of “responsible persons” who are no longer associated with the the employer. Persons no longer working for the employer are still subject to 6672.]

6. “Bank records that can be reviewed include:

a. "Cancelled checks and bank statements

b. "Signature cards and correspondence to the bank relative to changes affecting the signature cards

c. "Loan applications and records of loans

d. "Any other records that may be relevant to determining which individuals were involved in the financial affairs of the business.”

7. “The bank records will be reviewed to determine:

a. "Authority of persons to sign checks and deposit funds

b. "Authority of persons to obligate the corporation by borrowing

c. "Diversion of funds to officers, members, etc.

d. "Deposits and withdrawals of alleged loans to corporation by officers, members, directors, etc.

e. "Excessive salaries, expenses, etc.

f. "Payment of other obligations

g. "Deposit records for monies received for sale of assets

h. "Deposit records of payments for stock in the corporation

i. "Any other relevant records.”

C. Determine whether probability of collection is likely or minimal: IRM 5.7.5

1. Where present and future collection is minimal, do not assess TFRP - IRM 5.7.5.3.1

2. Manuals require determination of ability to pay - IRM 5.7.5.3

The process expressed in 5.7.5.3 is simply an abbreviated version of the directives the IRS follows to determine the ability to pay in any collection case. Links to the IRM's involved with the processes are provided at the discussion on Financial Analysis. It will commence with completion of Form 433-A, and progress through all the subsequent processes of verifications, searches for other assets, determining present and future income potential and etc. A target who is clearly subject to 6672 and who is absolutely unable to pay is usually wise to complete Form 433-A. In the event the IRS assesses against an indigent target the groundwork has been laid to submit an offer in compromise immediately upon the assessment.

3. Ilustrations in IRM re whether assessment is "collectible" - IRM 5.7.5.3(3)

4. Assess TFRP where there is future "collectibility" - IRM 5.7.5.3.2

5. Practical applications:

It is observed by many that there is no genuine opportunity to contest TFRP-assessment against an appropriate target even when the evidence persuasively supports the conclusion that collection potential is minimal. The government loses nothing by completing the assessment in every case where the target is an appropriate person. In practice, representatives report that "minimal collectibility" does not seem to be defined by reference to amount. Despite the fact that TFRP-targets will never be able to pay more than a "miniscule" amount of any TFRP assessment, the assessments are still being completed. As some have heard from the RO's conducting the investigation, if it appears that ANY AMOUNT will be collectible now or in the future, the assessment will be made regardless of the fact that the amount collected will be utterly miniscule. Perhaps the viewpoints vary among the IRS offices depending on a manager's point of view. Though assessment against a target from whom miniscule amounts could be collected seems to contradict the illustration expressed at IRM 5.7.5.3(3) there seems no practical opportunity to invoke the manuals to compel a different outcome. Perhaps it is prudent to actively prepare to submit an Offer in Compromise.

IV. Case law re responsible persons: {top}

The following is provided to report how the courts have approached the analysis of the evidence relating to the “responsibility” element. The cases illustrate how the appearance of responsibility is to be explored and the kinds of evidence that tend to prove persuasive.

A. Godfrey v. U.S., 748 F.2d 1568 (Fed. Circuit – 1984). The universal governing legal principle repeated in this opinion from the Court of Appeals is this: §6672 is not applicable to persons even where they are thoroughly and substantially involved in the operation of a corporation where such persons have no power to control the decision-making process by which the corporation allocates funds to other creditors in preference to its withholding tax obligations.

1. The Circuit Court of Appeals for the Federal Circuit reversed the Court of Claims’ determination that the taxpayer was subject to §6672. The detailed evidence at trial proved that Godfrey was heavily involved in the corporation’s financial concerns, but the various high levels of involvement did not show the taxpayer was responsible in any way for payment of employment taxes. Clearly, the evidence created an appearance of involvement, control, and significant influence over many functions and considerations, but the Court’s analysis reveals that all the evidence merely created an appearance of power to control payments. The evidence did not establish taxpayer had any duty of any kind relating to the payment of the taxes.

2. The taxpayer, Godfrey, was heavily involved in the management and operation of the corporation. Godfrey, a business lawyer, was elected to the board of directors. He also accepted appointment as Chairman of the Executive Committee where he provided consultation and advice concerning the corporation’s financial and personnel problems. Godfrey exercised powers allocated to him under the bylaws to participate in electing officers. He either hired or approved engaging high-level consultants. He delegated authority to establish bank accounts, and determined who would be the persons authorized to sign on those accounts. He authorized borrowing from lenders, approved settlements made by the officers, and approved the content of loan agreements. When the corporation’s operating losses reached a critical point, Godfrey participated in obtaining loans to accomplish a recapitalization. Godfrey was informed that federal taxes had not been paid. He instructed the persons in charge of paying the corporation’s debts to pay the taxes and he did not inquire further into the matter. This entire aggregation of involvements was determined to be insufficient to establish Godfrey was a “responsible person” because the balance of the evidence proved that other persons, and not Godfrey, were charged with tax-related responsibilities and duties.

3. The evidence proved that all daily operations were controlled by the President and the Vice President. Those persons signed checks, and were charged with the direct responsibility to prepare payroll, withhold taxes, prepare 941’s and pay the government. While federal taxes were due and owing, it was the President and the Vice President who decided that instead of paying the taxes only those bills that absolutely had to be immediately addressed to continue operating would be paid. Godfrey was not part of that decision-making process at any time. And when the IRS entered the picture it was Godfrey who contacted the IRS to ask for more time – but the circuit court correctly concluded that contact was NOT evidence that he had any responsibility to attend to payment of the past due taxes.

4. Power to control what bills get paid: The Heart of the case

The Appeals Court repeats the governing legal principle applicable to the determination of whether a taxpayer is a “responsible person” within the meaning of §6672. The Court writes (emphasis supplied) –

 “The overwhelming weight of case precedent requires the fact finder to look through the ‘mechanical functions of the various corporate officers’, White v. United States, 372 F.2d at 516, to determine the persons having ‘the power to control the decision-making process by which the employer corporation allocates funds to other creditors in preference to its withholding tax obligations.’ Haffa v. United States, 516 F.2d 931, 936 (7th cir. 1975). The inquiry required by the statute is ‘a search for a person with ultimate authority over expenditure of funds since such a person can fairly be said to be responsible for the corporation's failure to pay over its taxes.’ White v. United States, 372 F.2d at 517. See also Barrett v. United States, 580 F.2d 449, 452 (Ct.Cl. 1979); Bauer v. United States, 543 F.2d 142, 148 (Ct.Cl. 1976).” (emphasis supplied)

B. Anderson v. U.S., 71A AFTR 93-3946 @ 3947, 3948: For purposes of §6672 a “responsible person” is one who has ultimate authority over the corporation’s funds to direct payment of creditors. The court rejected the argument that being a member of the board of directors automatically makes a person responsible for purposes of §6672. Where the evidence establishes that a person lacks significant control over financial affairs of a corporation, such person is not a “responsible person” within the meaning of §6672.

C. Schlosser v. U.S., 73 AFTR 2d 94-1106 (DC MO 1993). Under §6672, no person is a “responsible person” unless they have significant authority to make decisions concerning the corporation’s tax matters. The court awarded attorney’s fees to the taxpayer in this case upon finding the government’s position was not substantially justified. The court expressly noted a patent deficiency in the evidence upon which the government based its determinations. The evidence adduced by the government showed only that “plaintiff had authority to sign certain checks, that he had some authority over payroll and bank deposits, that he signed certain tax returns, and that he exercised increased responsibilities during the illness and absence of Claudia Cox. However, assuming these facts to be true, they fall far short of proof that plaintiff had significant decision-making authority regarding the company's taxes.” In awarding attorney’s fees to the taxpayer, the court specifically noted evidence which the government had apparently utterly ignored. Testimony available from persons associated with the corporation established that the taxpayer had been specifically instructed to not involve himself with tax matters. The government failed to produce evidence to establish that the taxpayer had significant control over the financial decision-making. The government’s case ignored the evidence available before trial proving the taxpayer’s utter lack of decision-making authority. For that reason, attorney’s fees were awarded to the taxpayer.

D. Barton v. U.S., 988 F.2d 58 (8th Cir. 1993). §6672 is not applicable to a person unless they have significant decision-making authority over the corporation’s tax matters. The court expresses this principle: “A person’s technical authority to sign checks and duty to prepare returns are not enough to make the person responsible under the statute.” “Officers who lack tax-paying authority, however, cannot be held liable under §6672 because of their position alone  .  .  . [T]he government cannot reasonably rely on the officer’s corporate status and mechanical functions if it is beyond dispute that the officer lacks tax-paying authority.” The courts awarded attorney’s fees to the taxpayer on finding that the government’s position was not substantially justified. Here, the government had forced the matter to trial knowing it had not assembled proof sufficient to contravene the taxpayer’s clear testimony that showed he was executive vice president who was second in command of the corporation, had authority to sign tax returns and checks for small purchases, and allowed his signature to be rubber stamped on payroll checks, but that he lacked significant authority in matters related to the corporation’s federal tax payments.

E. Barrett v. United States, 580 F.2d 449, 42 AFTR 2d 78-5381, 78-2 USTC para. 9570 (Ct.Cl. 1979). A “responsible person” is one who has authority to direct the expenditure of corporate funds in payment of creditors. Mere authority to co-sign checks not coupled with authority over corporate financial affairs does not make a person “responsible” for purposes of §6672.  Persons who have authority to co-sign checks are not responsible persons where that role is not also connected to financial authority such as making the payroll, paying employees, representing the company in creditor relationships, negotiating contracts, billing customers, order supplies, or hire and fire employees.

F. Barnett  v. U.S., 988 F.2d 1449 (5th Cir. 1993). Responsible persons may not be insulated from the reach of 6672 even where they have been lied to about payment status and other matters. At the moment a responsible person learns of the unpaid debt they are required to prefer the government as a creditor above all others. With regard to determining whether a person is "responsible" the Fifth Circuit writes, “The crucial inquiry is whether the person had the ‘effective power’ to pay the taxes — that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay the taxes owed.”  The Fifth Circuit concluded the taxpayer was a “responsible person” within the meaning of IRC §6672 based on the following facts in evidence and that the failure to prefer the government constituted a willful failure to pay over:

* Barnett was a director and president

* Barnett owned 20% of the stock in the corporation

* Barnett directed daily operations, handled operational problems, purchased supplies, and hired, fired, and supervised field personnel.

* He contacted customers, bid on jobs, and negotiated contracts.

* He reviewed bills from creditors and at times recommended whether a creditor should be paid or not.

* Barnett actively participated in all major financial decisions including acquisition and financing of equipment.

* At the company’s Lafayette office, Barnett maintained a checking account and wrote many checks without consulting with anyone else.

* He was also authorized to write checks to pay creditors from the other company accounts maintained in the company offices in a different city, and from that account Barnett wrote the paychecks after he became president.

* Barnett had a right to know all that was going on in the company, and was repeatedly assured “everything was going alright.”

* Anderson was charged with the primary responsibility to attend to the accounting and all tax matters. He repeatedly assured Barnett everything was fine.

* Anderson lied – the payroll taxes had not been paid.

* When that fact was learned, Barnett continued paying others with checks he personally wrote. He did not pay the payroll taxes.

* At trial on the claim for refund, the jury concluded Barnett was not a “responsible person” and never reached the question of “willfulness.”

The Firth Circuit concluded Barnett was a “responsible person” and that he willfully failed to pay the taxes due. The court writes, “Responsibility is simply a threshold question under 6672: it is determined by looking to one’s status within a corporation – that is, one’s duty and authority to withhold and pay taxes.” Also, “the question of the existence of a duty to comply with section 6672 ‘is considered in light of the person’s authority over an enterprise’s financial and general decision-making.’” Barnett performed all of those functions regularly as part of his daily activity.

G. Raba v. United States, 977 F.2d 941 (5th Cir. 1992) – Penalty was imposed on chief financial officer for willful failure to pay over payroll taxes. Taxpayer knew taxes were due, misrepresented the existence of the delinquency to principal shareholders, and personally directed payment to other creditors instead of the IRS. Taxpayer's overall financial responsibilities gave him effective power to pay taxes.

H. McCray v. United States, 910 F.2d 1289 (5th Cir. 1990) – §6672 was applicable where taxpayer was chairman of the board, vice president, and had direct knowledge that the taxes were due and owing when he personally paid other creditors and not the taxes. It was clear he had all power and authority over finances and payment of taxes.

I. Howard v. United States, 711 F.2d 729 (5th Cir. 1983) – §6672 was applicable where taxpayer was shareholder, director, treasurer and executive vice president who had previously caused employment taxes to be paid to the government. The court specially noted the taxpayer ran daily operations of corp. and signed most of its checks without requiring another signature. He had personally caused certain back-taxes to be paid on another occasion and clearly had authority to cause payment of tax obligations. Taxpayer asserted that he was threatened with being fired if he paid the taxes. The court properly held that the threat did not displace the fact that his control over day-to-day operations and knowledge of unpaid taxes revealed he had power of control over the corporation’s finances and was a responsible person.

J. Neckles v. United States, 579 F.2d 938 (5th Cir. 1978). The court specifically notes the taxpayer signed most checks, participated in just about everything that went on in the business, and decided which creditors would or would not be paid. He had actual knowledge the withholdings had not been paid over, and he personally continued to pay other creditors without paying over the withholdings. Accordingly, 6672 was applicable.

K. Wilson, Jr. v. U.S., 35 AFTR 2d 75-740, 75-1 USTC para. 9205 (DC-GA 1975) – §6672 was inapplicable where the government relied upon inferences that might be associated with taxpayer’s position and authorization to write checks. Taxpayer was secretary on the board of directors and had authority to sign on the account from which payroll was paid. But as such, taxpayer had no authority to direct payment of bills. Other persons were in control of that function and exercised all control in those matters. Accordingly, the court found the taxpayer was not a “responsible person” within the meaning of §6672.

L. Bauer v. United States, 543 F.2d 142, 38 AFTR 2d 76-5975, 76-2 USTC para. 9720 (Ct. Cl. 1976) - Penalty for failure to collect and pay over withholding tax not imposed on officer-director of corp. His duties were technical and had nothing to do with the corporation’s financial affairs. The court took note of several features of taxpayer’s connection with the corporation. The taxpayer was not involved with the payroll, was never involved with payment taxes or preparation of tax returns. He had no significant involvement purchasing supplies, dealing with creditors, deciding which creditors would be paid, borrowing money, directing issuance of payments, and etc. The court noted the taxpayer did not have control, custody or possession of the corporation’s books, records or checkbooks. Taxpayer did not sign checks and was not involved in any of the corporations’ financial and banking activities, and that other persons executed those functions. Accordingly, the court found the taxpayer was not a “responsible person” within the requirements of §6672.

M. Abramson v. U.S., 55 AFTR 2d 85-1479, 85-1 USTC para. 9380 (DC NY 1985). The Secretary-treasurer of the corporation was not a responsible person for purposes of §6672 where he lacked control over the employer's finances and exercised no authority as to what debts or creditors should be paid and when. The court noted and relied upon evidence establishing that the corporation’s president exercised all control over all financial matters and signed the checks to pay the bills. The court specifically noted that though taxpayer was authorized to sign checks, the checkbook was at all times in the control of the president, and taxpayer never influenced who would and would not be paid.

N. Kielisch v. U.S., 58 AFTR 2d 86-5719, 86-2 USTC para. 9631(DC WI 1986). §6672 was inapplicable to the secretary even though she had check signing authority. She prepared minutes of board meetings and wasn't involved in company's day to day affairs. The court noted and relied upon the evidence that taxpayer did not have anything to do with the company’s payroll or its tax returns, did not have any contact with suppliers, had no authority to enter contracts, and did not hire or fire employees.

O. No independent authority; subject to control of superiors - Policy Statement P-5-14 which provides, in part, as follows: "In general, non-owner employees of the business entity, who act solely under the dominion and control of others, and who are not in a position to make independent decisions on behalf of the business entity, will not be asserted the trust fund recovery penalty."

P. By-law provisions conferring power and authority to control are sufficient to establish responsibility under 6672. United States v. Strebler, 313 F.2d 402 (8th Cir. 1963).

Q. Write checks - lack of that power does not ipso facto preclude application of 6672. United States v. Graham, 309 F.2d 210 (9th Cir. 1962).

V. “Willfulness” in the IRM’s {top}

A. IRM’s on willfulness:

The exact provisions of governing portions of the IRM’s are set out in this section to expedite review. Some of the statements in the IRM are incorrect, and some comments have been applied. Otherwise, these sections of the IRM disclose the principles, processes and procedures that RO’s are provided to develop evidence of willfulness. Familiarity with these provisions permits the analyst to compare what the RO is doing with the detailed instructions the RO is obligated to follow. Circumstances sometimes arise where an RO will not conduct a proper investigation and tend to reach wrong conclusions. Representatives in possession of important sources of evidence not obtained or reviewed by the RO may be positioned to deter the RO from even proposing to assess against an individual when the evidence described in the IRM's is organized and place before the RO.

B. Willfulness in IRM 5.7.3.3.2

1. “Willful” defined:

Means intentional, deliberate, voluntary, reckless, knowing, as opposed to accidental. No evil intent or bad motive is required.

2. Courts reject "should have known" element:

IRM 5.7.3.3.2(2) appeared in the prior version of the IRM. For some reason, those statements are not part of the newer version of the IRM. There is a likelihood that the since the prior provision was clearly rejected by the courts it has been omitted. The prior version stated, “To show willfulness, the government generally must demonstrate that a responsible person was aware, or should have been aware, of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. A responsible person's failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid satisfies the TFRP "willfulness" element. See IRM 5.17.7.1.3.” [Comments: Courts have rejected “should have known” as proof of willfulness. In addition IRM 5.17.7.1.3 does not include “should have known” as an element. For example, in Kalb v. US, 505 F.2d 506 (2d Cir. 1974), cert den., 421 US 979 (1975), the second circuit points out that merely having a duty to know about whether a corporation’s taxes have been paid does not establish “willfulness” for purposes of §6672. At 511 the court writes,

“In the district court and in this court the government does not deny Herold's claim, but argues that because of his official capacity he had a duty to know about the arrearage in withholding taxes. A corporate officer acts ‘willfully’ within the meaning of section 6672, the government argues, when he should have known that taxes owed were not paid. We cannot agree. Conduct amounting to no more than negligence is not willful for purposes of §6672. Dudley v. United States, 428 F.2d 1196, 1200 (9th Cir. 1970). It is, however, not necessary that evil motive or intent to defraud be proven in order to establish willfulness. Monday v. United States, 421 F.2d at 1216; Bloom v. United States, 272 F.2d at 223. Monday defined willful action under §6672 as "voluntary, conscious and intentional—as opposed to accidental—decisions not to remit funds properly withheld to the Government." 421 F.2d at 1216. That definition has been widely accepted. Dudley v. United States, 428 F.2d at 1198 n. 3.” (emphasis supplied)

C. Willfulness in Legal Reference Guide for RO’s: IRM 5.17.7.1.3 {top}

1. “Under IRC § 6672(a), the failure to collect or pay over trust fund taxes must be willful.”

2. “Definition of willful — intentional, deliberate, voluntary, reckless, knowing (not accidental). No evil intent or bad motive is required. Domanus v. United States, 961 F.2d 1323 (7th Cir. 1992). [Comment: The case law is full of identical statements of the definition of willfulness.]

3. “To show ‘willfulness,’ the government must show that the responsible party was aware of the outstanding taxes and either deliberately chose not to pay the taxes or recklessly disregarded an obvious risk that the taxes would not be paid. Phillips v. United States, 73 F.3d 939, 947 (9th Cir. 1996).

4. Failure to investigate, correct:

“A responsible person's failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid satisfies the IRC § 6672 ‘willfulness’ requirement. Finley v. United States, 123 F.3d 1342 (10th Cir. 1997).” [Comment: The same principle is expressed in other circuits also. For example, in Kalb, supra at 511 the Second Circuit writes, “Willful conduct also includes failure to investigate or to correct mismanagement after having notice that withholding taxes have not been remitted to the Government.”] It is also worth noting that while Finley probed the "reasonable cause" defense, the 10th Circuit writes, "We therefore conclude reasonable cause sufficient to excuse a responsible person's failure to pay withholding taxes should be limited to those circumstances where (1) the taxpayer has made reasonable efforts to protect the trust funds, but (2) those efforts have been frustrated by circumstances outside the taxpayer's control."

5. Payment of net wages:

“The payment of net wages (wages minus trust fund taxes) to employees when funds are not available to pay withholding taxes is a willful failure to collect and pay over under IRC § 6672. If funds are not available to cover both wages and withholding taxes, a responsible person has a duty to prorate the available funds between the United States and the employees so that the taxes are fully paid. For purposes of determining willfulness, an employee owed wages is merely another creditor of the business, and preferences to employees over the government constitute willfulness. Hochstein v. United States, 900 F.2d 543, 548 (2d Cir. 1990).”

6. Reasonable cause - a split in the Circuits:

“Generally, a responsible person’s willfulness is not negated where the failure to pay was due to reasonable cause. Olsen v. United States, 952 F.2d 236 (8th Cir. 1991).”

a. Some Circuits embrace "Reasonable Cause" or "Justifiable Excuse"

1. Court of Claims – McCarty Jr. v. U.S., 437 F. 2d 961 (Ct. Cl. 1971). Though this is more in the nature of an “estoppel” case the language demonstrates the court’s intent to take all factors into account to prevent an inequitable application of §6672.

2. Fifth Circuit – Frazier v. U.S., 304 F.2d 528 (5th Cir. 1962). Notice that while the Fifth Circuit has included the "reasonable cause "element" it has also openly stated that it has a very limited application. In Bowen v. U.S., 836 F.2d 965, 968 (5th Cir.1988), The Fifth Circuit writes "[a]lthough we have recognized conceptually that a reasonable cause may militate against a finding of willfulness, no taxpayer has yet carried that pail up the hill." Exactly the same statement has been repeated by the Fifth Circuit in Logal v. United States, 195 F.3d 229, 233 (5th Cir.1999).

3. Second Circuit – Winter v. U.S., 196 F.3d 339 (2nd Cir. 1999) [Comment: The Second Circuit relies upon its prior recognition of a species of the “reasonable cause” exception. It depends upon whether a belief that taxes were being paid was reasonable under the circumstances.]

4. Tenth Circuit - as related to the question of "willfulness" see Finley, supra.

b. Some circuits that rejected “reasonable cause”

1. First Circuit -  Harrington v. United States, 504 F.2d 1306 (1st Cir. 1974)

2. Seventh Circuit – Monday v. United States, 421 F.2d 1210 (2nd Cir. 1970)

3. Ninth Circuit – Sorensen v. United States, 521 F.2d 325 (9th Cir. 1975)

7. Mistaken belief:

The manual states, “A mistaken belief that trust fund taxes do not have to be paid does not make the failure to pay non-willful. Thomsen v. United States, 887 F.2d 12, 17 (1st Cir. 1989).” [Comment: The manual omits to inform RO’s of the important additional case law concerning mistaken beliefs as "reasonable cause" for conduct. The applicable rules of law will vary depending upon where appeal would lie in the case. See Golsen v. Commissioner, 445 F.2d 985 (10th Cir. 1971). Link supplied through resource.org]

VI. Postponing Assessment or Collection of TFRP: IRM 5.7.4.8.1 {top}

A. Three years to assess:

The TFRP must be assessed against an individual within three years of April 15th of the year following the year to which the assessments relate, or 3 years from the date the Form 940 or 941 was filed, whichever is later. IRM 5.7.3.5. IRC 6501. All of the exceptions to the 3-year rule provided in IRC 6501 are applicable.

B. IRS can choose to delay assessment

Even where the evidence clearly would support assessment the IRS can choose to not immediately assess. IRM 5.7.4.8.1 specifically provides that a revenue officer can secure an in-business installment agreement rather than recommending immediate assertion of the TFRP, as long as: TP makes an installment agreement, the TFRP assessment date to assess against the “target” (responsible person) is extended appropriately, and the evidentiary compilation supporting TFRP assessment is documented and preserved.

1. Make Installment Agreement required

To delay the 6672 assessment the employer must qualify for an in-business installment agreement. IRM 5.14.7 lays out the guidelines and requirements for such business agreements. This means that all available liquid resources will have been applied, equities in assets have been absorbed without crushing the business, and the balance will be paid according to the employer's “ability-to-pay.”

a. Repeat Offenders:

Won’t qualify for installments. IRM 5.7.4.8.1(2) and 5.7.8.

b. No longer a repeater:

Where TP becomes compliant by accruing no more unpaid liabilities and files all returns they will no longer be considered a repeater and can otherwise qualify. IRM 5.7.4.8.1(3). However, taxpayers with a history of non-compliance are highly likely to find that their proposed alternatives to levy are rejected. Even Appeals gives much weight to a history of non-compliance in the process of determining "“Whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.”

c. Easy way out:

"In-Business Trust Fund Express" agreement.

2. ASED controls assessment decision:

a. The TFRP assessment statute must be extended by agreement where duration of installment agreement ends with less than one year left on the TFRP assessment statute. IRM 5.7.4.8.1(2).

1. Extension required:

Assume the corporation’s installment agreement is to run for a three-year term from the date it is accepted. If the returns upon which the assessments were made were timely filed, the TFRP 3-year assessment statute will expire before the agreement is complete. IRS will require an extension of the statute.

2. Assess but delay collection:

It is not uncommon that the TFRP-assessment process will be fully pursued, but collection activity will often be withheld so long as the TP-employer performs its obligations under the IA. See IRM 5.14.7.4.1(8).]

b. Delay is discretionary

Even where the duration of installment agreement ends with more than one year left on the TFRP assessment statute, IRS may choose to proceed with the TFRP assessment process depending upon the facts and circumstances. IRM 5.7.4.8.1(5).

c. Withhold assessment - Policy:

Where there are no concerns about the assessment statute expiration date, and there is full compliance with a business installment agreement, it is ordinarily the IRS’ policy to not recommend assessment. IRM 5.7.4.8.1. Thus, when asked to extend the assessment statute, the person subject to the assessment must decide whether to agree to the extension in order to potentially avoid the assessment and any lien that may be filed in the public record.

3. Preserving the Record

The investigative aspects of the TFRP inquiry will documented and preserved in case circumstances compel the IRS to assess the TFRP when it has initially withheld to do so. At any point in the future the IRS will have the documentary evidence sufficient to support an immediate move toward the assessment on the occurrence of any event.

C. Target’s choices re extending ASED:

The person targeted for the TFRP assessment (“target”) will sometimes need to make some choices depending upon their situation:

1. Target liable:

If the evidence supports the conclusion that Target is subject to the TFRP it might be prudent to explore granting the required extension to enable IRS to not proceed with the assessment while TP services an installment agreement. Target must be informed that if TP defaults in the performance then IRS can proceed with the processes to recommend and make the proposed assessment.

2. Target has sound defense:

If the evidence reveals that IRS’ intention to proceed toward TFRP assessment is not warranted, then Target’s decisions can become somewhat more complicated. It seems appropriate to thoroughly discuss whether to refuse to extend the ASED and force the matter to Appeals by protesting the forthcoming Letter 1153. As a practical consideration, if the IRS intends to NOT proceed with the assessment process while an installment agreement is being performed perhaps Target would not be waiving a significant advantage by merely extending the statute in order to perhaps avoid the cost and stress of constructing and presenting the required formal protest.

VII. Protesting the Proposed Assessment: Developing TP’s Defense {top}

A. 60-day appeal period:

1. Letter 1153 provides the written notice of the 60-day appeal period. The letter states the government’s proposed assessment.

2. Form 2751 and the 1153 give notice of all of the quarterly periods for which the assessment is proposed and the IRS’ computations.

3. No assessment for other elements

IRC 6672 reaches only the trust fund. An assessment under §6672 cannot include any other penalty-amounts. It is expressed in the statute and the case law. First National Bank v. U.S., 591 F.2d 1143 (5th Cir. 1979)

4. ASED suspended:

Mailing the notice of prosposed assessment suspends the 3-year assessment statute as provided in IRC 6672(b)(3).

B. Appeal Procedure:

Rev. Proc. 2005-34, 2005-24 IRB 1223 describes the procedure to Appeal proposed §6672 assessments.

C. Appeal Procedure per IRM’s:

IRM 5.7.6 re-states the appeal processes and procedures as follows:

1. Timely filing:

Protests are timely filed where the 60-day period ends on a weekend or holiday and the protest is mailed the following weekday. IRS waits five days more to allow for receipt and processing of any protest.

2. 10-day period for discussion:

IRM 5.7.6.1.3 mentions the 10-day period that will be described in Letter 1153. TP may request contact the RO to discuss the resolution or present new evidence. But the 60-day period continues to expire and is not suspended.

3. FTM is available under IRM 5.7.6.1.3.

A request for Fast Track Mediation does not suspend the running of the 60-day period, and because the manual indicates the process takes about 30 to 40 days, TP must be prepared to instantaneously submit the protest within the running 60-day period if FTM is pursued. If the RO agrees to FTM the request-documents must be submitted to Appeals within 3 days from the date of TP’s signature on the agreement to FTM.

4. ASED suspended:

Filing a protest suspends the assessment statute. FTM does not suspend the ASED.

5. Protest Content:

Both IRM 5.7.6.1.5 and the Letter 1153 itemize the information that MUST be included in the protest.

6. File the protest in duplicate.

7. Imperfect Protest:

TP is to be advised of any defects in the protest and provided the opportunity to cure defects prior to the end of the 30-day period to complete TFRP processing. IRM 5.7.6.1.6

8. Late-filed protest:

Under 5.7.6.1.6(3) the IRS will inform TP that the assessment will be made, there is no administrative appeal available, and that TP may file a claim for refund.

9. Claim for Refund - Refund Litigation:

If appeals sustains the proposed assessment (or where TP fails to submit a timely protest) TP must follow a specific procedure to stay collection of the assessment and to lay the groundwork for proceeding to court. Letter 1153 summarizes the process for paying a divisible portion of the tax, posting the required bond, filing a Form 843 (Claim for Refund), and proceeding to refund litigation.

a. Demand for payment will arrive:

Once the assessment has been made after Appeals has sustained the proposed assessment in whole or part, IRS will send its demand for payment.

b. Response to Demand:

If TP intends to proceed to refund litigation and to also stop collection activity until final judicial resolution, these steps are required under IRC 6672(c).

1. Pay "divisible" portion of each quarter:

For each quarter for which assessment has been made, TP may pay a "divisible" portion of the assessments which is the full amount of the trust fund for one employee in each of the assessed periods.

2. Post BOND:

Post the bond described in IRC 6672(c)(3). If this bond is not posted collection activity may resume for the entire unpaid balance. It must be 1.5 times the unpaid balance of the assessment. Treasury approved sureties (those approved as sureties under Title 31) are listed in Circular 570.

a. Sureties are Reluctant:

It is being reported that the sureties will not write these bonds in 6672 cases. For those few who can be found who will supply the required bond collateral equal to at least 150% of the maximum possible TFRP (matching the 150% requirement of 6672(c)(3)) must be provided and the premiums are very high.

b. Alternatives to bonding with approved sureties:

Notice that there are alternatives to the allowable forms of security that may be provided to forestall collection during the pendency of refund ligitation. See Regs. 301.7101-1(b). Under IRC section 7701 and Regs. 301.7101-1(b)(2)(iii), for example, a litigant is permitted to secure the government during pendency of the litigation through a mortgage against property. Suggestion: If a taxpayer is considering using the mortgage approach it must be borne in mind that the terms of the mortgage must be constructed such that the potential significant economic loss is avoided. A significant economic loss could arise in the event the litigation is lost and the IRS moves to foreclosure - a forced sale that will not likely produce a price that is even close to the full fair market value of the property.

3. File Form 843, Claim for Refund:

This is required by 6672, and it is an absolute prerequisite to commencing suit per IRC 7422.

4. 6-month Review:

Under IRC 6532 no refund suit can be commenced until 6 months after the claim was filed (if the IRS does not timely respond) or after the IRS rejects the claim, whichever is earlier.

5. Receive claim rejection, file suit within 30-days:

Once the notice of denial of the claim is issued suit must be filed within 30-days. Failure to do so dissolves the stay against collection activity under IRC 6672(c)(2). Upon filing the suit, collection activity is suspended under the provisions of IRC 6331(i).

b. Right of contribution:

IRC 6672(d) provides a right to recover from other responsible persons so that no single responsible person bears more than a proportionate share of the burden. The statute precludes joining an action for recovery to the actions described in 6672(d)(1) and (2).

D. Check computations and Designated Payments: {top}

IRM 5.7.4.1.1 specifically directs RO’s to not mention “designated payments.” According to the “Sequence of Payment Application” at IRM 5.7.4.3 all undesignated payments will be applied in a specific, government-favoring order. If payments were made with a designated application be sure to make sure the directions were followed. For example, where designated payments were made by either the corporation or by the Target and were to be applied to the trust fund portion of the account balance, make sure those payments were so applied. Some persons submitting payments electronically have at times found that the directions were not followed. If an error occurred, cure the error because it affects the magnitude of the remaining unpaid trust fund portion. 6672 allows assessment of only the trust fund portion of the tax.

E. Target’s lack of resources:

IRM 5.7.5.1 states, “A collectibility determination must be made in order to determine if the trust fund recovery penalty (TFRP) should be assessed. This collectibility determination must be documented in the narrative portion of Form 4183 for all persons in which the TFRP is being recommended . . . The TFRP will normally not be assessed when the likelihood of successful collection is minimal.” In practice, many of us have experienced situations where a Target is an employee, earns a modest salary, has assets that are utterly miniscule in relation to the magnitude of the proposed assessment, and have heard remarks such as “minimal has nothing to do with the relationship between the assessment and what portion of it they can pay. So long as they are collectible to any extent, the assessment is to be made.” Perhaps there are situations where representatives should energetically focus on the massive gap between the potential TFRP and the 433-A, and specifically point to the “policy” expression stated IRM 5.7.5.1. very early in the process. Persons financially unable to provide more than a minimal collection potential ought to be dropped from the group of potential targets identified by the RO. See full texts of linked resources above at III.C.

F. Constructing The Protest:

Remember, the Target’s protest is being submitted to the SAME Revenue Officer who has proposed the assessment.

1. Identify errors in computation, allocation of payments made.

2. Present new evidence:

It can be powerfully helpful to be able to provide NEW INFORMATION not previously considered by RO. Where the evidence is not new and has previously considered, it is common that the RO will not be likely to change views. The opportunity to present NEW evidence omitted and overlooked by the RO can sometimes help the RO’s recommendation. An RO is instructed to withdraw the proposed assessment when they agree with the protest. IRM 5.7.6.1.7. It often occurs that a representative first learns of the investigation only after Letter 1153 has been served on the target. Strong opportunities can emerge to identify and present important evidence that the RO did not previously obtain or consider.

3. Focus on exculpatory evidence:

A highly organized, logical presentation of all evidence negating “responsibility” and “willfulness” can also induce the RO to adopt a changed view. Even where there is not much new evidence, the organization and ordering of the presentation can sometimes have the effect of changing the RO’s understanding of the evidence and the conclusions to be formed. If the RO does not change conclusions and will not withdraw the recommendation, this same protest will be forwarded to Appeals. It also becomes a vitally important record of evidence submitted to the government in the event refund litigation becomes necessary.

4. Focus on attorney’s-fee case law:

Sometimes TFRP cases come in shades of gray, and others are clear black-and-white cases supporting either the government or the TP. Where the case tends to quite strongly favor TP it may become very useful to focus attention upon cases where the government chose to ignore, or failed to properly consider, clear evidence supporting TP’s defense. Some cases may very closely relate to this Target’s situation and enable Appeals to decline to sustain the recommended assessment. This begins laying the groundwork needed to show the court EVERYTHING that was made available to the government, how the government utterly ignored or failed to give proper consideration to such evidence, and whether TP’s case meets the requirements for awarding attorney fees to TP. {top}