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May 09, 2017

Working with IRS Revenue Officers and Defending the Trust Fund Penalty Investigation

The tax attorneys at Nardone Limited in Columbus, Ohio, are committed to keeping taxpayers updated on how to utilize the Internal Revenue Service’s collection alternatives to manage their federal tax liabilities. The IRS has broad authority and tools available to collect delinquent taxes, including conducting a trust fund investigation of responsible persons. When an IRS revenue officer contacts a taxpayer, it is important that the taxpayer be aware of and understand the various collection alternatives available to resolve federal tax liabilities. Aside from simply paying the tax liability in full, there are various collection alternatives available to taxpayers that can help reduce or eliminate tax liabilities arising from an IRS audit or examination, including, but not limited to: (i) offer-in-compromise; (ii) installment agreements; (iii) currently not collectible status; (iv) discharge taxes in bankruptcy; and (v) challenge to the underlying tax liability.

Background Regarding Trust Fund Investigations

Internal Revenue Code (“IRC”) §6672, or otherwise referred to as the trust fund recovery penalty or a civil penalty, is one of the most invoked sections of the Internal Revenue Code by the IRS.  The statute creates a unique vehicle for the collection of what are referred to as trust fund taxes (i.e., those taxes collected from employees and held in trust for the United States).  In the context of employment taxes, the term trust fund taxes refers only to taxes withheld from employees—federal income taxes and one half of Federal Income Contributions Act (FICA)—not to the portion of employment taxes that the business itself owes, such as its matching share of FICA or the Federal Unemployment Tax Act (FUTA).  Regardless of whether the service attempts to collect the unpaid taxes from the business as the primary obligor, IRC §6672 empowers the IRS to collect the unpaid trust fund tax liabilities of corporations and other limited liability entities from the personal assets of those persons who are responsible for the nonpayment of the taxes. 

Willfulness

As part of the trust fund investigation, the IRS revenue officer will pursue all responsible persons under IRC §6672.  One of the many defenses that arise—as it relates to the IRS revenue officers’ attempted assessment against responsible persons—is the element of willfulness.  Willfulness is not defined in the IRC.  Rather, the Internal Revenue Manual section 5.7.3.3.2 provides the following definition:

“Willful means intentional, deliberate, voluntary, reckless, knowing, as opposed to accidental.  No evil intent or bad motive is required…  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.”

The willfulness element of IRC §6672 is a lower standard than willfulness for criminal tax purposes.  See Stake v. United States, 347 F. Supp. 823 (D. Minn. 1972) (stating that the term “willfully,” as used in statute subjecting to penalty a person who is required but willfully fails to collect, account for and pay over any tax, is not the same as when used in sections imposing a criminal liability and instead means a choice voluntarily, consciously and intentionally made to pay other creditors before paying the government). Generally, willfulness exists if: (i) the responsible person was aware that the taxes were unpaid and, possessing the power to pay them with funds of the taxpayer entity, signed checks paying another creditor; or (ii) the responsible person’s actions were “grossly negligent” or in ‘reckless disregard’ of the fact that the taxes were due and would not be paid. 

Defenses to Willfulness

Thus, recognizing the elements for purposes of the definition of willfulness, taxpayers must consider the facts and circumstances of their particular case, to establish the necessary defenses.  When we think through willfulness, we have to apply that concept of willfulness to the underlying facts and circumstances.  We have to come up with credible and supportable arguments for purposes of the defense.  Below are some of the commonly cited defenses to a trust fund investigation determination that the taxpayer’s conduct was willful: 

  • Establish that responsible person was merely negligent. Generally, this involves proving that the person did not know the taxes were unpaid and did not a good reason to know; 
  • Establish reasonable cause in not paying the taxes. This defense, though generally available in penalty defenses, is generally unavailable in TFRP cases; however, some circuits have cited to this defense.  Research your circuit and tailor your argument accordingly;
  • Establish that no funds existed at the time the person became responsible. This defense becomes available when an individual takes over a financially distressed business with unpaid trust fund taxes.  Look to fit into the circumstances described by the Supreme Court in Slodov v. United States, 436 U.S. 238 (1978); and
  • Establish that the person, though having general management control, did not have control over the finances of the corporation.

Contact Nardone Limited

 Nardone Limited frequently represents individuals and businesses in federal tax matters, including collection alternatives. If you or your business have been contacted by an IRS revenue officer, or are struggling with tax liabilities, you should contact one of our tax attorneys today. Nardone Limited’s tax attorneys have vast experience representing clients before the IRS. We will thoroughly review your case to determine what options and alternatives are available to you.  Contact us today for a consultation to discuss your case.

 

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May 09, 2017

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