By Matthew Porter, Esq., LL.M
The tax lawyers at Nardone Law Group, LLC regularly update our clients in Columbus, Ohio and throughout the United States on recent court cases so they better understand IRS audits, examinations, and trust fund recovery penalty investigations. If you or your business has been the subject of a trust fund recovery penalty investigation initiated by a revenue officer with the Internal Revenue Service (“IRS”), you may know that the IRS revenue officer is seeking to establish who within the business is a responsible person. The IRS can personally assess the trust fund recovery penalty against those who it determines are liable for the trust fund recovery penalty, and it collects the liability from their personal income and assets. Due to the potentially devastating impact that a trust fund recovery penalty assessment can have on your personal financial situation, it is extremely important to know how and when an IRS revenue officer determines your liability. The below case highlights the importance of understanding the factors courts examine for purposes of assessing the trust fund recovery penalty.
Wife Liable for Trust Fund Recovery Penalty Despite Limited Involvement in Company
In Johnson v. United States, the Court of Appeals for the Fourth Circuit affirmed a district court ruling that a sole shareholder of a company was liable for the responsible person penalty even though she had minimal involvement in its day-to-day operations and did not learn of the deficiency until being told by IRS. The Court rejected the taxpayer’s claim that she did not act willfully because the company continued to pay creditors after she learned of the back taxes. In determining that the taxpayer was a responsible person, the Fourth Circuit examined whether she had the effective power to pay the taxes. In other words, the court looked at whether she had the actual authority or ability to pay the taxes owed—which she did by virtue of her status within the corporation. Although the taxpayer’s husband was delegated the duties to run the day-to-day operations of the company—including paying the company’s creditors—the Court found that the taxpayer was the corporation’s sole shareholder for many years and had the power to change the officers and directors as she chose. And, therefore, she could direct the business of the corporation. As both vice president and chair of the board of directors, she enjoyed considerable actual authority at the company.
The Importance of Understanding the Concept of “Responsible Person”
The Appeals Court held that even though the taxpayer delegated and entrusted her authority to her husband, this did not relieve her of responsibility under Code Sec. 6672. As a result, she remained a “responsible person” because she had effective control of the corporation and the effective power to direct the corporation's business choices, including the withholding and payment of trust fund taxes. The Court’s decision highlights the importance of understanding that when a responsible person learns that withholding taxes have gone unpaid in past quarters for which they are responsible, the taxpayer has a duty to use all current and future unencumbered funds available to the corporation to pay back those taxes. In the Johnson case, the record demonstrated that the corporation continued to make payments to other creditors using unencumbered funds following receipt of the IRS notice. This error was detrimental to the taxpayer’s case and resulted in an assessment of over $300,000 against the taxpayer.
Contact Nardone Law Group, LLC
Nardone Law Group represents individuals and businesses with federal tax issues, including those who have fallen behind on their trust fund taxes and who are being assessed with the trust fund recovery penalty by IRS revenue officers. The tax lawyers at NLG have vast experience in representing individuals and businesses with the trust fund recovery penalty. If you are struggling with tax liabilities and are currently involved with a trust fund recovery penalty investigation with an IRS revenue officer, you should contact an experienced tax attorney today. Our experienced tax lawyers will work with you through the trust fund recovery penalty investigation to analyze whether or not you are a responsible party. Contact us today for a consultation to discuss your case.