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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.

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Trust Fund Recovery Penalty (100% Penalty)

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
2. Willfulness

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.

Also, be aware that the IRS will request targeted taxpayer's, as well as other potential witnesses, to complete an interview form (form 4180). The purpose of the questions is to determine liability (an element of which is “willfulness”). Experience has shown that persons do not understand nor appreciate the significance of their responses.

The IRS representative is not your friend. He or she is there to achieve the objective of targeting as many persons for the liability as possible.  These forms should never be filled out without the aid and assistance of legal counsel.

The serious nature of the Responsible Person “Interview” and form 4180, is that there exists not only civil liability exposure for the Trust Fund Recover Penalty, but also the potential for criminal prosecution.

Taxpayers should not attend an Interview / Meeting concerning these matters,  or  fill out form 4180 (Report of Interview With Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes), without the assistance and advise of  a Tax Attorney. See further discussion here



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. 








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