Just because the IRS says you are personally responsible for your company's payroll trust fund taxes doesn't mean you necessarily are. The IRS must prove certain things, first. You may have a defense to one or more of these things.

In In re Clements the taxpayer filed a complaint to determine the dischargeability of an IRS assessment against him personally for a corporate withholding tax claim (the 100% penalty assessed against the "responsible person"). The court held that any person who was a director, indirect owner, or treasurer of a corporation is presumed to be a "responsible person" for purposes of the statute imposing the 100% penalty for failure to pay over the withheld tax.

In that case the taxpayer was held responsible where he was an officer of the corporation, was fully aware of the financial difficulties of the company, was aware that some creditors were having to be put off, was in control of the company's finances during the time in question, and was in a unique position to know that taxes were due and to ensure that they were correctly deposited and paid over.

But see contrary finding on very similar facts, In re Hughes, 137 B.R. 614 (E.D.Va. 1992) where the taxpayer was an officer, but found not to be a responsible person. "Under 26 U.S.C. § 6672, an individual is not a responsible person just because he happens to be a corporate officer. (citations) ... The most important consideration, however, as to whether an individual is a responsible person is whether he had control of the corporate check book. Before a person will be held accountable for willfully failing to remit withholding taxes to the United States, that person must have had 'authority to direct or control the payment of corporate funds' during the payment period at issue." The opinion discusses other factors to be considered.

See In re Brown, 130 B.R. 456 (W.D.Pa. 1991) where court found the restaurant manager not liable for unpaid payroll taxes where, even though manager was an officer and director of the franchisor, he lacked authority to direct payments and determine which creditors should be paid.

The elements that must be proven to establish a taxpayer as a responsible person and liable for the unpaid taxes were discussed in Matter of Pippinger, 117 B.R. 756 (M.D.Ga. 1990). This opinion shows that two basic elements must be proven under IRC 6672(a); one, that the taxpayer is a responsible person under the IRC; and two, that the taxpayer willfully failed to pay over the money. The opinion cited Thibodeau v. United States, 828 F.2d 1499 (11th Cir. 1987) for embellishment on these two elements. Under Thibodeau a responsible person is " ... an officer or employee of a corporation who is under a duty to collect, account for, or pay over the withheld tax. Responsibility is a matter of status, duty and authority, not knowledge. Indicia of responsibility includes (sic) the holding of corporate office, control over financial affairs, the authority to disburse corporate funds, stock ownership, and the ability to hire and fire employees. It is undisputed that more than one person may be a responsible officer of the corporation under § 6672."

On the issue of willfulness, the Thibodeau court said "Once it is established that a taxpayer is a responsible person, the burden of proving lack of willfulness is on the taxpayer. (citation) The former Fifth Circuit defined 'willfully' as 'meaning, in general, a voluntary, conscious and intentional act.' "

The opinion stated that "Once a responsible person discovers there is a deficiency, he has an obligation to remedy the situation if the means are within his control." This statement seems to imply that an element of willfulness is that the responsible person have the ability to pay the taxes. Accordingly, in a situation where there were insufficient funds, on the due date, to pay the taxes over, it could be argued that the failure to pay the taxes was not willful, thus relieving the taxpayer of personal liability.

Cases in which the Tax court has been favorable to the taxpayer include Greenberg v. U.S. 83-1 USTC ¶ 9257 (1983) (plaintiff was corporate secretary and had check-signing authority, but was not in a position to influence corporate policy); Pototzky v. U.S., 85-1 USTC ¶ 9438 (1985) (corporate officer abandoned supervision of day-to-day operations prior to time trust fund taxes were not paid; held not a responsible person); Barrett v. U.S. 580 F.2d 449 (1978) (taxpayer's husband controlled corporate affairs); Godfrey v. U.S. 748 F.2d 1568 (1984) (chairman of board did not exercise con trol over cor-porate funds).

See In re Ross, 122 B.R. 462 (Fla. 1990) where in an adversary proceeding to determine dischargeability the court ruled any partner in a general partnership is personally liable for payroll taxes regardless of the level of management participation by such partner.

Held, taxpayer who operated sole proprietorship as Chapter 11 bankruptcy taxpayer-in-possession postpetition was not personally liable for employment taxes incurred after she filed Chapter 11 petition. Bellus v. U.S. 125 F.2d 821 (9th Cir. 1997).

Held, an employer-employee relationship and not a partnership relationship existed where the taxpayer had sole control over bank accounts and books and filed his return as an individual and did not file partnership return. In re Boyd, 208 B.R. 230 (Bkrtcy.W.D.Okl. 1997).

Held, "A person who does all he can to cause taxes to be paid, and whose efforts are rejected by those with more control, is not a 'responsible person' against whom the 100% penalty may be assessed." Jones v. United States, 60 F.3d 584 (9th Cir. 1995).

Held, two individuals found by the trial court to be responsible persons were held by the Court of Appeal to not be responsible persons because "... they did not have the status, duty, and authority to pay the payroll taxes." United States v. Jones, 33 F.3d 1137 (9th Cir. 1994).

Held, Chapter 13 bankruptcy taxpayer was not responsible person under Massachusetts law, even if taxpayer was a "responsible person" under IRS Code, because taxpayer's partner, not taxpayer, was charged with filing all tax returns and paying taxes. In re Coveney 202 B.R. 801 (Bkrtcy.D.Mass. 1996). Held, Chapter 13 taxpayer was not liable for the company's tax debt because his failure to pay the company's federal withholding taxes was not willful. In re Abel, 200 B.R. 816 (E.D.Pa. 1996).

Held, in Chapter 13 case corporate president and majority shareholder was responsible person and liable for unpaid withholding taxes. Once responsible person status is established burden shifts to taxpayer to prove lack of willfulness. All that is required to find liability is finding that the taxpayer had knowledge that payments were being made to other creditors after knowledge that withholding tax obligation was not being paid. In re Rojo, 212 B.R. 1032 (Bkrtcy.S.D.Fla. 1997).

In investigating a taxpayer's potential liability for the trust fund recovery penalty the IRS employs IRS Forms 4180 (Report of Interview With Individual Relative to Trust Fund Recovery Penalty, and 4181 (Questionnaire Relating to Federal Trust Fund Tax Matters of Employer).

Held, president and fifty percent shareholder in corporate taxpayer qualified as responsible person for trust fund recovery. In re Macagnone, 224 B.R. 212 (Bkrtcy.M.D.Fla. 1998).

Held, taxpayer-officer not responsible after his corporation Chapter 11 was taken over by court appointed trustee who removed authority for payment of debts from the taxpayer. But held, were individual had authority when the employees were paid, but trustee took over just before withholding was to be paid to government and prevented payment, individual was still held responsible for non-pay ment.

In evaluating whether or not your client may have a defense to liability for the corporate payroll taxes it might be prudent to go down the list of questions that the IRS forms ask. Among the questions posed on the Interview Form are -

Did the taxpayer -

Hire/fire employees?

Manage employees?

Direct (authorize) payment of bills?

Deal with major suppliers and customers?

Negotiate large corporate purchases, contracts, loans?

Open / close corporate bank accounts?

Sign / countersign corporate checks?

Guarantee / co-sign corporate bank loans?

Make / authorize bank deposits?

Authorize payroll checks?

Prepare federal payroll tax returns?

When and how did you first become aware of the delinquent taxes?

What action did you take to see that the tax liabilities were paid?

Were discussion or meetings held by stockholders, officers or other interested parties regarding the nonpayment of the taxes? Describe.

Are minute of the meetings available?

If financial statements were prepared for the corporation, by whom were they prepared?

Did the corporation employ an outside accountant? If so, whom?

Who reviewed the payroll tax returns or tax payments?

Who handled contacts with the IRS?

Who made the decision whether or not to pay the payroll taxes?

Did any person or organization provide funds to pay net corporate payrolls?

Like ordinary income tax claims, the statute of limitations for assessment of a payroll withholding tax claim is three years (IRC § 6671) and the three-year period commences with the date of filing of the return, or from the succeeding date the return is due, whichever is later, pursuant to IRC § 6501(b)(2). The statute of limitations to assess the individual responsible officer for corporate payroll withholding is three years from filing of the applicable quarterly return. Jones v. U.S. 60 F.3d 584 (9th Cir. 1995); Lauckner v. U.S. 68 F.3d 69 (3rd Cir. 1995); Stallard v. U.S. 806 F. Supp. 152 (5th Cir. 1992). This period may be tolled by certain events. The assessment procedure is the same as that for income taxes. IRC § 6671. The statute of limitations for collection of payroll tax is 10 years from assessment, pursuant to IRC § 6502.

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