Trust Fund Penalty Applies Even If Individual Was Acting Under Orders from SBA Receiver to Pay Other Creditors First

The Eleventh Circuit Court of Appeals rejected a unique twist on the “my boss ordered me not to pay the trust fund taxes” defense in the case of Myers v. United States, CA 11, Case No. 18-11403.  In this case the party Mr. Myers claimed ordered him not to pay was an agent of the Small Business Administration (SBA) that had been appointed as a receiver of his employer.

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CEO and President, Relying on Work of Outside Auditor, Reasonably Believed Trust Fund Taxes Had Been Paid

The Sixth Circuit Court of Appeals in the case of Byrne v. United States, CA6, No. No. 2:06-cv-12179 had to decide if the president and CEO had acted recklessly in not insuring that trust fund taxes had been deposited when they were aware of issues with the quality of work performed by the controller.  If they had, they would be liable personally for the undeposited trust fund taxes under IRC §6672.

Any responsible person may be held personally liable by the IRS for unpaid trust fund taxes (that is, federal income taxes and FICA taxes withheld from employee’s paychecks) if the IRS can show that individual either:

  • Had actual knowledge that the taxes had not been paid and had the ability to pay the taxes (even if that meant not paying other bills) or
  • Recklessly disregarded known risks regarding a failure to pay such trust fund taxes.

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No Reasonable Cause Defense to Trust Fund Penalty Allowed in Ninth Circuit, CEO Liable for Responsible Person Penalty

In the case of United States v. Liddle, 119 AFTR 2d ¶2017-381 (USDC, ND CA) the CEO of two different companies that each had failed to remit trust fund taxes argued that while he was clearly a responsible person for purposes of the trust fund penalty, he should not be liable because he had acted with reasonable cause.

Some Circuit Courts of Appeal have taken the position that a responsible person may be relieved of liability for the trust fund recovery penalty under IRC §6672 based on a reasonable cause defense.

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Despite Signing Payroll Checks, Wife of Co-Owner Found Not to Be Responsible Person

To most practitioners, at first glance the facts in the case of Fitzpatrick v. Commissioner, T.C. Memo. 2016-199 would appear to doom Christina Fitzpatrick to being liable for the 100% trust fund penalty related to unpaid payroll taxes for the wine bar that was partially owned by her husband and for which she worked.

These “bad facts” included the fact that:

  • Christina had signature authority over the bar’s checking account
  • Christina signed payroll checks regularly
  • Christina selected and arranged to hire Paychex to handle the restaurant’s payroll

However, despite that apparent level of control, the Tax Court found that Christina was not a responsible party based on other facts in the case.

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Paying Final Payroll to Laid Off Employees After Discovering Unpaid Trust Fund Taxes Made CEO Liable for Trust Fund Penalty

The case of Arriondo v. United States, USDC SD Texas, Case No. 4:14-cv-02734 illustrates the dangers posed even to someone without an ownership interest in the company for unpaid withholding taxes under IRC §6672. In this case a taxpayer who was the CEO, president, treasurer and director of a company was found liable for the unpaid trust fund taxes due to a failure to inquire about the possibility of unpaid payroll taxes once he became aware the company was in financial difficulty and for paying other bills (including the salaries of employees) during the short period from the date he became aware of the unpaid taxes until the company filed bankruptcy.

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Claim Taxpayer Was Not Involved in Finances Did Not Make Taxpayer Not a Responsible Person

In the case of Waterhouse v. United States, United States Court of Federal Claims, 116 AFTR 2d ¶2015-5080 a corporate officer and holder of a 40% interest in the company’s stock argued that he was not a responsible person under IRC §6672 because he and another officer had agreed to divide up the responsibilities. 

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Bankruptcy Adequate Protection Payments Were Not Voluntary So IRS Not Required to Apply Payments to Trust Fund Taxes as Designated on Checks

A taxpayer’s attempt to designate her corporation’s adequate protection payments made in the corporation’s bankruptcy case failed in the case of Riggs v. Commissioner, TC Memo 2015-98. 

The taxpayer in this case had been the sole owner and president of a corporation that had run up significant payroll tax liabilities with the IRS.  The corporation ended up in bankruptcy and, although she attempted to start up a new corporation, the IRS found that corporation was a successor in interest to the tax liabilities, pulling it into the bankruptcy case that had been filed on behalf of the first corporation.  As well, the IRS found that Ms. Riggs, as President and sole shareholder of the corporation, was a responsible party who had willfully allowed trust fund taxes to go unpaid, finding her liable for the trust fund penalty under IRC §6672.

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