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Trust
Fund Recovery Penalty
No
good deed goes unpunished
You
were just trying to help out and now the IRS is after you
We
all desire to help out our family members and friends.
Say your family member owns a small business and they are going
on a trip. They ask you to merely sign a few checks for their business
while they are away. They
mention that a few suppliers will make deliveries, and they need
someone to simply pay for the deliveries, and the utilities, etc…,
while they are away. They
ask - can you help me out? Question:
what should you do? The
Answer is: SAY
NO!
The
bottom line is that if you are not making the actual decisions as to
the payment of creditors, and it is not your business, then do NOT be
an authorized signor on any account, and do NOT sign any checks! If
you do, then you have just painted a large bulls-eye on your forehead
for the IRS to target you for potential financial assassination.
If
the business fails to pay its employment taxes, the IRS will be
targeting you. Whatever
the eventual outcome, you will endure some, if not all, of the
following: stress, financial cost, potential IRS levy and seizure
actions, the potential filing of federal tax liens destroying your
credit, potential litigation, and you will come to the realization
that “Uncle Sam” was never your Uncle, is not kind or gentle, and
can be ruthless and oppressive.
In
Shaffran v. Commissioner, T.C. Memo 2017-35 (2017), (link
here), Petitioner
(“father”) had
retired. The father had suffered a heart attack and his wife had
suffered three strokes. The father was age 77 at the time of trial.
They had moved to Florida where their son oversaw the day to day
operations of a Restaurant, together with its owner.
The father would visit the restaurant two to three times a week
for several hours, “sat around” and sometimes act as a “gofer”
for the owner and his son. The father received deliveries and provided
suppliers with checks signed by his son or the owner.
The
Father’s time at the restaurant was social, but he occasionally
trained bartenders (under the direction of the owner and the son).
Also, the father would spend time at the restaurant while his wife
received physical therapy at a nearby swimming pool. The
wife’s three strokes had left her physically disabled and the father
often brought his wife to the restaurant so she could get out of the
house and enjoy the beachside views.
During
an approximate 12 day period the father signed four checks drawn on
the Restaurant’s operating account – two checks were to pay
suppliers for deliveries that arrived when the son and the owner were
not available. The other two checks were payable to the father and
mother in partial repayment of a loan, the payments being made at the
behest of the owner (the father had been instructed by the owner to
write the checks out and sign the owner’s name). However, the father
signed his own name on the checks because he was concerned about
“forging” the owner’s name.
Although the father was not an authorized signor, the bank
honored all four checks. The father did not sign any other checks or
otherwise determine how the Restaurant spent its available funds. The
checks signed by the father amounted to less than 1% of all the checks
that the Restaurant issued during that particular quarter.
Fast
forward. The Restaurant failed to pay the IRS payroll taxes, was
ultimately evicted from its location, and ceased doing business.
Several years later, the IRS Revenue Officer started
investigating for the purpose of targeting “responsible persons”
for the Trust Fund Recovery Penalty.
The problem faced by the IRS was that because it didn’t start
working the case early enough, the period of limitations for the
assessment of the Trust Fund Recovery Penalty was about to expire.
Accordingly, the IRS Revenue Officer, only 18 days after
beginning her investigation, recommended assessment of the Trust Fund
Recovery Penalty against the Father (and others). Prior
to making her
recommendation to impose liability against the father, the Revenue
Officer had not, inter-alia, secured the Restaurant’s bank records, and had not
made any attempt to interview the individuals against whom she was
proposing the Trust Fund Recovery Penalty,
The
Revenue Officer sent out Letter 1153 - the Trust Fund Recovery Penalty
letter to the father. However, the letter was not received by the
father. He thus had no opportunity to contest the proposed assessment.
In this regard, the son had intercepted the letter from the P.O. Box
which he shared with his father. The son did not turn the IRS Letter
1153 over to his father. The
assessment became final. The IRS then issued a Final Notice of Intent
to Levy and Notice of Your Rights to a Hearing, concerning IRS levy
notice and thereafter a Notice of Federal Tax Lien Filing and Your
Right to a Hearing (Lien notice). At this point, the father disputed
the liability by timely filing a Collection Due Process appeal of the
levy notice and the lien notice challenging the underlying liability. It
was because of the lack of prior opportunity to contest the liability,
that the Tax Court exercised jurisdiction to review the IRS
determination as to the underlying tax liability. This was within the
context of the Collection Due Process Hearing, and the filing of a Tax
Court petition for review filed in response to a Notice of
Determination sustaining the proposed collection actions.
In
Tax Court, the IRS attempted to paint the father as a “de facto
officer” because he signed four checks and had written out several
others for the signature of the son. This
bootstrap was rejected by the court.
The Tax Court determined that the father:
-lacked sufficient control over the Restaurant’s affairs to
avoid the non- payment of its employment taxes;
-was not an officer, director, employee or owner at any time;
and
-was never an authorized signatory on the Restaurants bank
accounts.
Further,
the Tax Court found the father’s testimony credible (together with
the administrative record) that he:
-did not have the authority to hire and fire employees;
-had no duty to, and did not, review or reconcile the
Restaurants bank statements; and
-had no control over disbursement and
decisions pertaining to the restaurants bank accounts, including the
payroll account; and that there was no evidence that the father had
any involvement in the preparation or filing of the Restaurants
employment tax returns or the payment of its employment taxes.
The Tax Court noted that the exercise of check signing
authority is a significant fact in determining whether someone has
authority to choose which creditors to pay. However, the Tax Court
observed that in this case, the father signed only four checks, that
all were signed in a span of two weeks when the owner was out of town
(and before four of the five tax periods in question); that the checks
were less that 1% of the checks for the Restaurant during a specific
tax quarter; and that two of the checks were written and signed only
after the owner had told the father to do so. As to the other two
checks, the Tax Court found there to be “unusual circumstances”
where the father was the only person available to take delivery of
vendor orders.
The Tax Court concluded that such limited check signing
activity did not support a finding that the father had sufficient
control over the Restaurants affairs to avert the non-payment of its
employment taxes. Accordingly,
the Tax Court found that the father was not a responsible person for
purposes of imposing liability for the Trust Fund Recovery Penalty.
It is worth noting that the father (pro se) did not file a post
trial brief as required. The
Tax Court commented that when a party does not file a brief on issues
that have been tried, the court may consider those issues waived and
conceded. In this case, the court exercised its discretion to not do
so. The judge is to be commended. The father dodged the bullet. It is
not in the record, but possibly, the father was simply unable to do
anymore, having already been subjected to IRS assessments, IRS demand
for payment, the filing of a tax lien(s), having to file for a
Collection Due Process Hearing and then receiving an adverse
determination. And then still having to file a Tax Court petition and
go through a Tax Court trial. Further, one must remember that the
record reflects that the wife had suffered three strokes and was
disabled. Possibly, the point of exhaustion had simply been reached.
On the other hand, if the court had found the father liable, then
there would be 10 years of facing IRS collection actions (e.g., bank
levies, etc…). Moreover,
these liabilities are not dischargeable in bankruptcy.
So,
after reading the above, if you are now asked by a friend or family
member to merely sign a few checks for their business while they are
away, pay a few suppliers who make deliveries, etc…,
what will you answer be? Hopefully,
you will say NO!
On the other hand, for those reading this who seek to rationalize and
analyze away the legal exposure, and are intent upon playing lawyer,
then be prepared to pay one.
Call
for your free consultation
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