Trust Fund Recovery
Penalty (100% Penalty)
- overview and some legal cases
The Trust Fund Recovery Penalty
(the 100% penalty) is authorized under section 6672 of the
Internal Revenue Code.
IRC Section 6672(a) provides the general rule:
Any person required to collect, truthfully account for,
and pay over any tax imposed by this title who willfully fails
to collect such tax, or truthfully account for and pay over such
tax, or willfully attempts in any manner to evade or defeat any
such tax or the payment thereof, shall, in addition to other
penalties provided by law, be liable to a penalty equal to the
total amount of the tax evaded, or not collected, or not accounted
for and paid over.
Thus, in determining whether to proceed with assertion of the
Trust Fund Recovery Penalty, the IRS must determine:
1. Responsibility and
NOTE: A person must be both
"responsible" and "willful" to be liable for
an employer’s failure to collect or pay over trust fund taxes to
the United States. The burden of production of the facts and
persuasion is on the taxpayer to prove, by a preponderance of the
evidence, that he is not a responsible person who willfully failed
to collect, account for, or pay over taxes.
Some case law links and
information are provided. However, a tax professional should be consulted.
Willfulness, within the meaning of section 6672 , has been defined as a
" 'voluntary, conscious and intentional act to prefer other creditors
over the United States.' " Klotz v. United States [79-2 USTC
¶9552 ], 602 F.2d 920, 923 (9th Cir. 1979) (quoting Sorenson v. United
States [75-2 USTC ¶9694 ], 521 F.2d 325, 328 (9th Cir. 1975)); see
also Maggy [77-2 USTC ¶9686 ], 560 F.2d at 1375; Teel v. United
States [76-1 USTC ¶9190 ], 529 F.2d 903, 905 (9th Cir. 1976). An
intent to defraud the government or other bad motive need not be proven. Klotz
[79-2 USTC ¶9552 ], 602 F.2d at 923. In fact, conduct motivated by a
reasonable cause may nonetheless be willful. Barnett v. United States
[79-1 USTC ¶9318 ], 594 F.2d 219, 221 (9th Cir. 1979).
In Henry D. Buffalow, Jr., v.
United States of America, US-CT-APP-9, [97-1 USTC ¶50,290] (1997)
a president and sole shareholder of a company who made a plan to liquidate
the company in an effort to secure a payment for the company's unpaid
withholding taxes was liable for the trust fund recovery penalty because
he was a responsible person who willfully failed to pay over withholding
taxes. Although he informed the IRS of his plan, he paid other creditors,
as part of the plan, while he knew the withholding taxes were unpaid.
Although he was trying to ultimately rescue something for the IRS, the
president, who was a continuing responsible person, was the one conducting
the rescue operations.
In Dan O.
Davis, v. United States of America, (Apr. 14, 1992) [92-1
USTC ¶50,292] (CA-9), U.S. Court of Appeals, 9th Circuit,
90-16209, 4/14/92, Affirming unreported District Court decision, A
president and major shareholder of a corporation was the responsible
officer liable for willfully failing to pay withholding and social
security taxes of the corporation's employees. The taxpayer contended that
because he lacked knowledge of the corporation's failure to pay taxes
until after they were due, his subsequent use of corporate revenues to
compensate creditors rather than to pay the delinquent taxes did not
evince willfulness. The courts view was that such argument was
inconsistent with the definition of willfulness promulgated by the Supreme
Court and other courts of appeals, and rejected the taxpayer's contention. He alternatively sought an order of
mandamus requiring the IRS to return to its original allocation of the
corporation's payments. This order was denied since the taxpayer failed to
show actual harm from the reallocation or a failure of the IRS to follow a
designation on a voluntary payment.
See: Slodov v. United States [78-1 USTC ¶9447 ], 436 U.S. 238,
The above limited information is intended for
informational purposes only. If legal advice or other expert
assistance is required, the services of a competent professional should
be sought, and this general information should not be relied upon
without such professional assistance.
contact A. Nathan Zeliff, Attorney at Law