What Happens to Employees When the Employer Fails to Pay Over to the Government Withheld Taxes

In Plazzi v. FedEx Ground Package System, Inc., No. 1:21:-cv-12130 (D. Mass. 2022), three employees sued their employer because their withheld wages were not paid over to the government.  I do not remember seeing such a suit previously, but this is a matter that I discuss with my students each semester.  Most of us pay taxes through third-party intermediaries.  Understanding the relationship between the third-party intermediary and you, the taxpayer, and the government is important.  The case provides a nice analysis of what I explain to my students each semester.  In addition to explaining how the system works, the court dismisses the complaint, finding that it is barred by statute.  If you are looking for a good explanation of how the third-party intermediary system of tax payment works, this relatively short opinion offers it up.


At some point each semester I ask the students if they have ever worked as an employee.  Almost all say yes.  I then ask what happens if their employer does not pay over the withheld taxes and how many of them checked to make sure their employer actually paid over to the government the taxes it withheld from their wages.  The students have almost never thought about what happens to their withheld wages and some have a concerned look as they begin to think about the possibility of the failure of their employer to send to the government the amount taken from their wages.  Usually, after a bit of mild prompting, at least one of the students will express the view that the responsibility for failing to pay over the withheld taxes should fall on the employer and not the individual.  We then discuss why it should work that way and a look of relief comes over those who began to have concerns.

Mr. Plazzi and the others who brought this suit had not had the opportunity to have such a discussion.  I understand why they would have concerns.  I am puzzled that they did not find a lawyer who could explain the way the system works to them before they went to the trouble to file the suit.

Major corporations like FedEx basically never fail to pay over the taxes they withheld.  So, I was a little surprised to see FedEx as the defendant in such a suit. The failure to pay over trust fund taxes regularly occurs in small businesses with cash flow problems usually run by an individual or a small group of individuals who are all in financially.  Executives of a major corporation should never put themselves in this position.

My surprise lifted as the court explained the facts.  Apparently, FedEx contracts with independent companies to deliver packages in some areas.  Learning this should not surprise me.  The US Postal Service does the same thing as do many other large enterprises.  Mr. Plazzi and his fellow plaintiffs worked for Eloah Delivery rather than directly for FedEx.  The court described the arrangement as follows:

Eloah was an “independent service provider” (“ISP”) of FedEx. ISPs typically handle three or more FedEx delivery routes and follow FedEx’s policies and procedures. FedEx maintains strict control over the way in which Plaintiffs and other delivery drivers working under ISPs perform their work. Delivery drivers hired by FedEx ISPs are classified as “employees” of the ISPs. For example, under its ISP Agreement with FedEx, Eloah agreed that it would “assign only Personnel, including officers and managers, that [Eloah] ensures are treated as employees of [Eloah] in the provision of Services under this Agreement.” Further, Eloah agreed under the ISP Agreement to “assume sole responsibility for payroll deductions and maintenance of payroll and employment records, and for compliance with Applicable Law, including . . . wage payment, final payment of wages, required withholdings from wages, deductions, overtime, and rest and meal periods.”

Like many small businesses, Eloah withheld taxes from its employees’ wages as required; however, it did not pay over the withheld taxes to the government.  Somehow, unexplained in the opinion, plaintiffs found out about this failure.  Plaintiffs argued that FedEx violated their rights under the Massachusetts Wage Act.  FedEx countered that their claim is barred by state and federal law.  In finding for FedEx, the court explained why such a claim is barred.

While I say that it was unexplained in the opinion how the employees knew the money was not paid over to the IRS, the opinion did provide an explanation of how they knew problems existed. 

Prado [the supervisor at the company] told Plaintiffs he was withholding taxes equaling twenty-three percent of their gross pay per week. Plaintiffs were under the impression that Prado was withholding all required state and federal taxes and that they would receive a W-2 tax form from the Internal Revenue Service (“IRS”) reflecting their gross wages following the 2020 calendar year. Plaintiffs never received their W-2 forms.

So, these employees have even more problems than not having their wages withheld.  They also appear not to have a statement sent to the IRS (or Social Security) reflecting the amount paid to them and the amount withheld.  If an employer never files these forms, employees struggle to get credit.  A procedure exists for creating a substitute W-2 but that usually relies on paystubs or a statement from the company.  This is a major procedural problem by itself which can be compounded where an employer insists on making wage payments through a platform like Zelle or a similar middleman.  The lack of receipt of W-2s may have played a large role in their decision to bring a case though it is not resolved through the decision.

The employees get credit for the withheld taxes regardless of whether the employer pays the money over to the government, though proving the money was withheld can, in situations like this, prove difficult.  Assuming the employees can establish their wages were withheld, any fight about the unpaid taxes becomes a fight between the government and the employer (and potentially any responsible persons under IRC 6672) and not a fight between the employees and the employer.  In explaining this, the court stated:

Employees, however, are barred from suing employers for failing to pay withheld taxes to the IRS: the Internal Revenue Code provides that “[t]he employer shall be liable for the payment of the tax required to be deducted and withheld . . . and shall not be liable to any person for the amount of any such payment.” 26 U.S.C. § 3403. “[T]his statute makes clear that while . . . the employer may be penalized by IRS for failure to pay the tax to it, suits against it by employees for taxes withheld from the pay of such employees are statutorily barred.” Chandler, 520 F. Supp. at 1156 (dismissing employee’s suit against employer for alleged conversion of money withheld from employee’s paycheck); see Bright v. Bechtel Petroleum, Inc., 780 F.2d 766, 770 (9th Cir. 1986) (citing Chandler, 520 F. Supp. at 1156) (affirming dismissal of claim seeking to recover withheld income tax as “statutorily barred”); Haggert v. Philips Med. Sys., Inc., No. 91-cv-30060-MAP, 1994 WL 673508, at *2 (D. Mass. Mar. 24, 1994), aff’d, 39 F.3d 1166 (1st Cir. 1994) (dismissing similar claim on same grounds). Similarly, Massachusetts law on tax withholding “tracks” the Internal Revenue Code and “is intended to replicate the effect of its counterpart in the federal code.” In re Nash Concrete Form Co., 159 B.R. 611, 615 (D. Mass. 1993).

So, it doesn’t matter to the employees that the employer failed to pay over the withheld taxes, but it does matter to employees that this withholding is documented.  They do not need to keep tabs on their employer or worry in any way about what happens to their money after it is withheld as long as they have the proper proof of withholding. 

This system of giving employees credit for any amount withheld makes perfect sense and explains why normally employees do not think about the issue.  Here, the shady method of making payroll and the apparent failure to send a year in statements puts these employees in an especially bad situation.

I am a bit troubled by the fact that the system also credits the responsible officers whose wages are withheld, but I guess that’s not a big enough concern for anyone to change the statute.  For anyone interested in my longer writings on the subject of trust fund taxes and what happens when the party holding the money in trust fails to pay it over, you can find my law review articles here, here and here.

Can Bankruptcy Trustee Be Held Liable for Trust Fund Recovery Penalty of Responsible Officer?

In In re Big Apple Energy, LLC, No. 8-18-75807 (Bankr. EDNY 2022), the owner of a business that failed to pay the taxes withheld from employees over to the IRS sought an order that the bankruptcy trustee was personally liable for the interest and penalties arising from the failure.  In rejecting this claim, the bankruptcy court found that the trustee could not be held liable for unpaid taxes for which no claim was filed against the estate.  The holding does not mean that a bankruptcy trustee could never have liability for the failure to pay trust fund taxes, but the court does not hold the trustee liable for taxes that arose before he came on the scene and where he fully paid the claim filed by the government entities.


The debtor initially filed a chapter 11 bankruptcy petition in 2018 but, as often happens, the case was converted to a chapter 7 later that year, at which time a trustee was appointed.  While operating as a chapter 11 the debtor failed to pay over the taxes withheld from its employees.  This failure would have served as an unmistakable statement that the debtor needed to convert to a liquidation.  When the bankruptcy court became aware of the failure, it ordered the owner to segregate money to pay the taxes and hold it in a special account.  When the conversion occurred, the owner turned the segregated account over to the trustee.  The IRS filed claims against the estate for the withheld taxes, as did the state.  Time marched on between the time the taxes were due and when they were ultimately paid.  This caused the accrual of interest and penalties due to the late payment.

In subsequent litigation between the estate and the owner, the parties entered a stipulation identifying the segregated funds and authorized the trustee to pay the IRS and state claims for the unpaid withholding taxes.  Unfortunately, the amount turned over to the trustee in the segregated funds covered only the unpaid tax and not the penalties which accumulated rapidly on the liability.  In a subsequent hearing the owner sought an order that the trustee pay the interest and penalties as well.  The trustee countered that neither the IRS nor the state had amended their claims to add on these amounts.  So, the trustee requested an order allowing him to pay the tax claims as filed.  The court granted this request.

Meanwhile, the IRS ramped up collection on the penalties against the owner while still not amending its claim.  The owner sought reconsideration of the distribution order, arguing:

that the Distribution Motion neglected to mention that the Trustee failed to timely pay the IRS Claims after Ferreira turned over the Segregated Funds. The Trustee’s inaction, Ferreira alleges, resulted in over $54,000 in penalties and interest being “assessed against the Big Apple Estate.” Ferreira argues that because the December 16 Order states the IRS and NYS Claims will be paid “in full and final satisfaction,” the Trustee signaled his intention to also pay the accrued IRS penalties and interest. This language, Ferreira submits, requires the Trustee to pay all interest and penalties that have been and may be assessed on the IRS Claims and NYS Claim. Therefore, Ferreira urges the Court to reconsider the December 16 Order pursuant to Federal Rule of Civil Procedure 59(e) and amend the December 16 Order to require the Trustee to also pay the penalties and interest that have been asserted by the IRS against Ferreira personally, and any that may be asserted in the future against Ferreira by the IRS and NYS for unpaid withholding taxes.

The trustee responded to this argument by pointing out that the order defined claims by referring to the specific claims filed against the estate.  He paid those claims after receiving the court’s permission.  The trustee further argued that the penalties and interest assessed personally against the owner differ, even though they have the same root cause, from the claims against the estate.  The trustee’s obligation is to pay debts of the estate and not collateral debts of the former owner of the company in bankruptcy.  The trustee also argued that the debts resulted from the owner’s failure to pay the taxes while operating the company during the chapter 11 phase of the bankruptcy and that it was the obligation of the owner to pay those taxes as they became due.

The owner replied to the trustee’s response by citing to drafts of the stipulation agreement under which he turned over the money designated for the payment of the taxes.  These drafts were exchanged during a mediation process.  The bankruptcy court found that it could not look at the drafts created during the mediation process because of Rule 408 of the Federal Rules of Evidence, which governs statements made during settlement and mediation discussions.  The bankruptcy court deemed these drafts inadmissible because of Rule 408 and also noted that the owner did not submit them during the process leading up to the distribution order.  In denying the motion for reconsideration, the court stated:

The Court agrees that the Trustee is neither obligated nor authorized to pay the personal penalties imposed on Ferreira from outstanding tax obligations when there are no claims filed against Debtors for such amounts. The Trustee is neither obligated nor authorized to pay claims that are not filed against Debtors’ estates. See generally 11 U.S.C. §§ 704(a)(2); 704(a)(5). Therefore, the Court does not find that there was “mistake” warranting Ferreira relief from the December 16 Order under Rule 60(b)(1).

This leaves the former owner of the business, Mr. Ferreira, holding the bag personally for a fair amount of penalty and interest resulting from the late payment of the taxes withheld from the employees.  Ultimately, the penalties and interest did stem from Mr. Ferreira’s failure to timely pay over the taxes as he was obligated to do as the person who controlled the company during the chapter 11 phase of the bankruptcy case when it operated as a debtor in possession.  The case demonstrates a danger to someone operating as a debtor in possession who does not keep current with the taxes because once the case is converted to a chapter 7 the finances of the company are no longer in their control which can result in significant delays in payment in addition to payment of an amount less than the former owner needed paid in order to avoid personal liability.  So, Mr. Ferreira not only has lost everything he invested in the business but comes out of the business bankruptcy with his own personal liability to the taxing authorities.

The court did not lay out when Mr. Ferreira was assessed the trust fund recovery penalty.  Persons hit with this penalty do receive a break on interest because it does not start running until the assessment against them.  Similarly, the penalties referred to, I believe, are penalties for failure to pay the trust fund liability which would also have run from the date of assessment.  The opinion does not contain enough detail for me to tell if the IRS claim included penalties and interest to a specific date.  Creditors generally lose the ability to claim interest for prepetition debts in a bankruptcy case though they have the ability to claim interest in postpetition debts such as this.  I don’t know if the IRS did claim some postpetition interest or if its claim merely included the unpaid tax.

The case highlights the importance of control.  Mr. Ferreira had control during the chapter 11 and lost it as the case converted to chapter 7.  His decision not to have the company pay the taxes while he had control ultimately leads to him being left holding the bag.  A potentially important lesson for others taking a troubled entity into chapter 11 bankruptcy and making decisions about who to pay and when to shut down.

Effective Tax Administration and Equitable Estoppel as Defenses to Assessment of Trust Fund Recovery Penalty

I am confused by the court’s introduction of the case which indicates that the IRS brought suit to hold Stanley Craft liable as a responsible officer.  Usually, the IRS assesses the Trust Fund Recovery Penalty (TFRP) and the responsible person brings a refund suit against the United States seeking to recover any amount paid and to obtain a determination they do not have the requisite responsibility.  Based on the timing of the assessment, I think that the IRS brought this suit to reduce its assessment to judgment, which it does when the normal statute of limitations is running short but it thinks that collection potential still exists.  I have written about this process before here.  After filing suit, the IRS moved for summary judgment – a move that also suggests this suit sought to reduce the assessment to judgment.

Despite my lack of understanding regarding how the suit began because I have not gone to the source documents, the case of United States v. Craft, No. 5:19-cv-00287 (E.D.N.C. 2021) clearly results in a finding that Mr. Craft is a responsible officer.  He makes some unusual arguments in his effort to avoid the imposition of the TFRP and those arguments deserve some discussion.


Mr. Craft, a software engineer, and his wife started a company to develop automated test equipment for circuit board manufacturers.  The company never grew very large in its corporate structure, it had no board of directors, and Mr. Craft served as the president.  At peak, it had about 17 employees and $1.3 million in annual revenue.  Mr. Craft did most everything at the business including “sales, some programming, leases, insurance, accounts payable, and accounts receivable.”  He had final authority over contracts and maintained the bank accounts.  In short, he had just about every decision making authority he would need to qualify as the responsible person for the business.

He primarily prepared the employment tax returns in house and he signed them.  During the years 2002-2005 he knew that the company did not pay these taxes.  The company formally dissolved in 2011 with the taxes still outstanding.  Eventually, the IRS assessed the TFRP against him and began the collection process.  At the time of this suit, he owed over $1.1 million.

The court goes through the elements necessary to establish a person as a responsible officer and has no difficulty finding that he fits all bases for imposing this liability.  Mr. Craft himself does not seem to put up much fight, if any, regarding his position as a responsible officer; however, his defenses to granting the summary judgment requested by the Service do deserve some attention.

First, he argues that granting summary judgment would create an economic hardship for him.  A $1.1 million liability would create an economic hardship for almost anyone.  What surprises me about this argument is not that the granting of the summary judgment would create a hardship but that he raises it in the context of litigation rather than in the context of an offer in compromise.  In 1998 Congress created Effective Tax Administration offers in compromise in IRC 7122.  We have discussed them previously here to highlight a rare litigation of such an offer. 

It’s possible to seek to compromise with the IRS or DOJ Tax Division during litigation by proposing an offer in compromise as discussed here.  DOJ does have a more liberal view of compromising than Chief Counsel as discussed here.  Mr. Craft, however, seeks not to obtain a compromise through the traditional pathway or through settlement but rather to have the district court determine that it should not grant a judgment to the IRS because doing so would promote effective tax administration. 

The court explains that this is not its role.  Mr. Craft should seek to work that out in a settlement with the government and not seek a court order on this point:

The IRS has authority to compromise civil tax liabilities to promote effective tax administration. See [D.E. 30] 4; 26 U.S.C. § 7122(a); 26 C.F.R. § 301.7122-1(b)(3). Such compromises, however, are appropriate “only prior to  — not after — their transfer to the” Department of Justice (“DOJ”). Johnson v. United States, 610 F. Supp. 2d 491, 498 (D. Md. 2009); see 26 U.S.C. § 7122(a) (authorizing compromises 7122(a)(authorizing compromises “prior to reference to the [DOJ] for prosecution or defense”); Brooks v. United States, 833 F.2d 1136, 1145-46 (4th Cir. 1987). Once the IRS refers a case to the DOJ, the Attorney General has authority to compromise tax liability. See 26 U.S.C. § 7122(a). The DOJ has not compromised this case, apparently believing that a compromise would not promote effective tax administration. See [D.E. 31] 1-2. Even assuming that grounds exist warranting a compromise in light of the financial burden summary judgment may impose on Craft, this court could not order the DOJ to compromise this case because “[s]ection 7122 is the exclusive method by which tax cases may be compromised.” Brooks, 833 F.2d at 1145.

The argument misconstrues the role of the court which is not to compromise but to decide.  Even if the government obtains the order it seeks here, it still has the ability to compromise.  All is not lost for Mr. Craft, but he is wasting time trying to get the court to do something that must come from his opposing party.

Next, he argues equitable estoppel.  Essentially, he argues that the IRS Revenue Officer (RO) who visited him many years prior had the authority to make a payment arrangement and he detrimentally relied on the RO to make such a payment arrangement which, had it occurred, could have taken care of the case.  (He fails to note that the creation of a payment agreement must be accompanied by actual payments.)  The court notes that this is a very difficult argument for someone suing or defending against the government to make:

“Equitable estoppel against the government is strongly disfavored.” Volvo Trucks of N. Am., Inc. v. United States, 367 F.3d 204, 211-12 (4th Cir. 2004); see Greenbelt Ventures, LLC v. Wash. Metro. Area Transit Auth., 481 F. App’x. 833, 838 (4th Cir. 2012) (per curiam) (unpublished); Miller v. United States, No. 2:11-cv-03026-DCN, 2012 WL 6674492, at *4 (D.S.C. Dec. 21, 2012) (unpublished); Nagy v. United States, No. 2:08-cv-2555-DCN, 2009 WL 5194996, at *4 n.6 (D.S.C. Dec. 22, 2009) (unpublished), aff’d, 519 F. App’x 137 (4th Cir. 2013) (per curiam) (unpublished). “If equitable estoppel ever applies to prevent the government from enforcing its duly enacted laws, it would only apply in extremely rare circumstances.” Volvo, 367 F.3d at 211-12; see Taylor v. United States, 89 F. Supp. 3d 766, 777 n.5 (E.D.N.C. 2014). Those rare circumstances may exist, “if ever,” because of “affirmative misconduct by government agents.” Dawkins v. Witt, 318 F.3d 606, 611 (4th Cir. 2003).

For equitable estoppel to apply, Craft must demonstrate that: “(1) the party to be estopped knew the true facts; (2) the party to be estopped intended for his conduct to be acted upon or acted in such a way that the party asserting estoppel had a right to believe that it was intended; (3) the party claiming estoppel was ignorant of the true facts; and (4) the misconduct was relied upon to the detriment of the parties seeking estoppel.” Id. at 611 n.6 (quotation omitted); see Miller, 2012 WL 6674492, at *4.

The Craft case does not cover new ground for either the TFRP liability, ETA offers or equitable estoppel; however, it does show that the defense to a suit to reduce a liability to judgment must be rooted in arguments that go to the correctness of the liability rather than to wished-for compromises or payment agreements.  By making arguments that could not win, he makes it easy for the court to grant summary judgment against him.  He will now owe the TFRP for a very long time.  Of course, the true measure of the government’s victory here lies in whether it can collect anything.  It appears not to have had too much success in the first 10 years of the liability’s existence.  Nothing in the case provided a clue whether more time will bring future success.

Recent Tax Court Case Highlights CDP Reach and Challenges With Collection Potential (and a little Graev too)

I read with interest Gallagher v Commissioner, a memorandum opinion from earlier this month.  The case does not break new ground, but it highlights some interesting collection issues and also touches on the far-reaching Graev issue.


First the facts, somewhat simplified.  The taxpayer was the sole shareholder of a corporation whose line of business was home building and residential construction.

The business ran into hard times and was delinquent on six quarters of employment taxes from the years 2010 and 2011. IRS assessed about $800,000 in trust fund recovery penalties under Section 6672 on the sole shareholder after it determined he was a responsible person who willfully failed to pay IRS. IRS issued two notices of intent to levy including rights to a CDP hearing. The taxpayer timely requested a hearing, and the request stated that he sought a collection alternative.

After the taxpayer submitted the request for a CDP hearing the matter was assigned to a settlement officer (SO). There was some back and forth between the SO and the taxpayer, and the taxpayer submitted an offer in compromise based on doubt as to collectability for $56,000 to be paid over 24 months. After he submitted the offer, IRS sent a proposed assessment for additional TFRP for some quarters in the years 2012 and 2014.

The SO referred the offer to an offer specialist. Here is where things get sort of interesting (or at least why I think the case merits a post). The specialist initially determined that the taxpayer’s reasonable collection potential (RCP) was over $847,000. That meant that the specialist proposed to reject the offer, as in most cases an offer based on doubt as to collectability must at least equal a taxpayer’s RCP, a figure which generally reflects a taxpayer’s equity in assets and share of future household income.

Before rejecting the offer, the specialist allowed the taxpayer to respond to its computation of RCP. The taxpayer submitted additional financial information and disputed the specialist’s computation of the taxpayer’s equity in assets that he either owned or co-owned.  That information prompted the offer specialist to revise downward the RCP computation to about $231,000 after the specialist took into account the spouse’s interest in the assets that the taxpayer co-owned and also considered the impact of the spouse on his appropriate share of household income.

Following the specialist’s revised computations, the taxpayer submitted another offer, this time for about $105,000. Because it was still below the RCP (at least as the specialist saw it), she rejected the follow up offer, which led the IRS to issue a notice of determination sustaining the proposed levies and then to the taxpayer timely petitioning the Tax Court claiming that IRS abused it discretion in rejecting his offer and sustaining the proposed levies.

So what is so interesting about this? It is not unusual for taxpayers to run up assessments and to then disagree with offer reviewers on what is an appropriate offer and to differ on RCP. RCP calculations are on the surface pretty straightforward but in many cases, especially with nonliable spouses, illiquid assets and shared household expenses (as here) that calculation can be complex and lead to some differences in views.

In addition, the opinion’s framing of the limited role that Tax Court plays in CDP cases that are premised primarily on challenges to a collection alternative warrants some discussion. The opinion notes that the Tax Court’s function in these cases is not to “independently assess the reasonableness of the taxpayer’s proposed offer”; instead, it looks to see if the “decision to reject his offer was arbitrary, capricious, or without sound basis in fact or law.” That approach does not completely insulate the IRS review of the offer (or other alternative) from court scrutiny, and in these cases it generally means that the court will consider whether the IRS properly applied the IRM to the facts at hand. While that is limited and does not give the court the power to compel acceptance of a collection alternative, it does allow the court to ensure that the IRS’s rejection stems from a proper application of the IRM provisions in light of the facts that are in the record and can result in a remand if the court finds the IRS amiss in its approach (though I note as to whether the taxpayer can supplement the record at trial is an issue that has generated litigation and differing views between the Tax Court and some other circuits).

That led the court to directly address one of the main contentions that the taxpayer made, namely that the specialist grossly overstated his RCP due to what the taxpayer claimed was an error in assigning value to his share of an LLC that owned rental properties.  This triggers consideration of whether it is appropriate to assign a value for RCP purposes to an asset that may in fact also be used to produce income when the future income from that asset is also part of the RCP. The IRM addresses this potential double dipping issue but the Gallagher opinion sidesteps application of those provisions because the rental properties did not in fact produce income, and the offer specialist rejection of the offer, and thus the notice of determination sustaining the proposed levies, was not dependent on any income calculations stemming from the rental properties.

The other collection issue worth noting is a jurisdictional issue. During the time the taxpayer was negotiating with the offer specialist, IRS proposed to assess additional TFRP for quarters from different years that were not part of the notice of intent to levy and subsequent CDP request:

Those liabilities [the TFRP assessments from quarters that were not part of the CDP request] were not properly before the Appeals Office because the IRS had not yet sent petitioner a collection notice advising him of his hearing rights for those periods.  In any event, the IRS had not issued petitioner, at the time he filed his petition, a notice of determination for 2012 or 2014. We thus lack jurisdiction to consider them. [citations omitted]

Yet the taxpayer in amending his offer included those non CDP years in the offer. The Gallagher opinion in footnote 5 discusses the ability of the court to implicitly consider those non CDP years in the proceeding:

We do have jurisdiction to review an SO’s rejection of an OIC that encompasses liabilities for both CDP years and non-CDP years. See, e.g., Sullivan v. Commissioner, T.C. Memo. 2009-4. Indeed, that is precisely the situation here: the SO considered petitioner’s TFRP liabilities for 2012 and 2014, as well as his TFRP liabilities (exceeding $800,000) for the 2010 and 2011 CDP years, in evalu- ating his global OIC of $104,478. We clearly have jurisdiction to consider (and in the text we do consider) whether the SO abused his discretion in rejecting that offer. What we lack jurisdiction to do is to consider any challenge to petitioner’s underlying tax liabilities for the non-CDP years.

This is a subtle point and one that practitioners should note if in fact liabilities arise in periods subsequent to the original collection action that generated a collection notice and a consideration of a collection alternative in a CDP case. Practitioners should sweep in those other periods to the collection alternative within the CDP process; while those periods are not technically part of the Tax Court’s jurisdiction they implicitly creep in, especially in the context of an OIC which could have, if accepted, cleaned the slate.

The final issue worth noting is the opinion’s discussion of Graev and the Section 6751(b) issue. While acknowledging that it is not clear that the TFRP is a penalty for purposes of the Section 6751(b) supervisory approval rule, the opinion notes that in any event the procedures in this case satisfied that requirement, discussing and referring to the Tax Court’s Blackburn opinion that Caleb Smith discussed in his designated orders post earlier this month:

We found no need to decide that question because the record included a Form 4183 reflecting supervisory approval of the TFRPs in question. We determined that the Form 4183 was suffic- ient to enable the SO to verify that the requirements of section 6751(b)(1) had been met with respect to the TFRPs, assuming the IRS had to meet those requirements in the first place.

Here, respondent submitted a declaration that attached a Form 4183 showing that the TFRPs assessed against petitioner had been approved in writing by …. the [revenue officer’s] immediate supervisor…. In Blackburn, we held that an actual signature is not required; the form need only show that the TFRPs were approved by the RO’s supervisor. Accordingly, we find there to be a sufficient record of prior approval of the TFRPs in question.

Summary Opinions for June

Before covering the June tax procedure items we didn’t otherwise write on, I wanted to highlight that Keith was quoted in a Seattle Times’ article about the IRS/Microsoft litigation, where MS is questioning the length of its audit and the Service’s hiring of Quinn Emanuel to investigate its tax obligations.  Other tax procedure luminaries Stuart Bassin (who is working with Les on rewriting part of SaltzBook addressing disclosure litigation) and Professor Andy Grewal (a PT guest poster) were also quoted.   Keith’s last post on the topic can be found here, where he discusses Senator Hatch’s letter to the Commissioner questioning the use of an outside law firm on audits.


  • The 2015 IRS annual Whistleblower Report to Congress was released in June and can be found here.  In 2014, the Service paid out around $52MM in awards, representing about 17% of the tax it claims was collected due to WB’s information.  Submissions to the WB group were up in 2014, with over 14,000 claims being filed.  Of those, about 8,600 were opened.  The report paints a slightly rosier picture of the program than what may be practitioners’ perceptions of the program.  It does note issues with taxpayer confidentiality, and whistleblower protection. The report also provides a spreadsheet of the reasons for closing cases and the time most cases have been in the program (which tends to be fairly long).
  •  This Tax Court case has a fair amount of tax procedure packed into it.  In Webber v. Comm’r, the Court found a taxpayer had retained control and incidents of ownership over life insurance held in a trust, which caused some negative tax  consequences.  In coming to this determination, the Court found that the IRS Revenue Rulings dealing with the “investor control” doctrine were entitled to Skidmore deference under the “power to persuade” standard.  The Court also found reasonable cause due to the taxpayer’s reliance on his advisor.  In the case, the advisor was an expert and was paid hourly to review the transaction, and had the pertinent information.  We just wrote this case up for SaltzBook, so I won’t go into too much detail (don’t want to give all the milk away, as we definitely want to keep selling cows).
  • Agostino & Associates has published its July Monthly Journal of Tax Controversy.  Frank and his associate Brian Burton have a nice piece on the public policy of OICs.  As always, it is interesting and essentially a mini law review article.
  • BMC Software v. Comm’r is a Fifth Circuit case we (I) missed in March that was potentially significant in how closing agreements are interpreted.  Miller & Chevalier’s Tax Appellate Blog has coverage here.  The facts are fairly specific, and the applicable Code sections do not pertain to many taxpayers.  What is important is that the Fifth Circuit reversed the district court, and held that the boilerplate in the opening paragraph stating, “for income tax purposes” did not cause the agreed treatment of a tax item for one purpose as applying for all purposes under the Code.  The Court would not read that into the agreement of the two parties, who had meticulously spelled out the specific tax treatments for one purpose.
  • Another case with multiple interesting tax procedure items.  In Riggs v. Comm’r, the Tax Court ruled on 1) whether a bankruptcy stay for the taxpayer’s successor-in-interest applied to the taxpayer, and  2) whether the IRS had to follow the taxpayer’s instructions about which debts its payment should be applied to when the Bankruptcy Court directed the payment generally.  As to the first point, the court found there was not sufficient “identity between the debtor and the [taxpayer] that the debtor may be said to be the real party defendant”, so the stay did not apply.  As to the second point, the Court found the payments were not voluntary, and therefore it did not have to follow the taxpayer’s instructions under Rev. Proc. 2002-26.  I would assume the Court would have specifically directed the payment application in the order had it been requested.
  • Hard to talk to an accountant these days and not discuss the tangible personal property change of accounting method.  The Service has provided additional time to file Form 3115 and modified some procedures.  See Rev. Proc. 2015-33.
  • For those of you who do work with Section 6672 penalties, you know the definition of willfulness and actually running a business can be in conflict.  Often, a business that is light on cash has to make a decision about which bills to pay, and sometimes the business thinks that suppliers need payment to keep product flowing.  If a responsible person makes such a decision and knows the withholding taxes are delinquent, Section 6672 penalties will almost certainly apply.  See Phillips v. US, 73 F3d 939 (9th Cir. 1996).  The Court of Federal Claims had occasion to review one such case in Gann v. US, and dismissed the government’s motion for summary judgement.  It held that determining when and whether the responsible person had knowledge of the company’s failure to pay taxes was a disputed issue of fact.  The Court found that simply showing that cash inflows and outflows indicating someone wasn’t going to get paid weren’t enough for summary judgement, and some level of actual knowledge was needed by the responsible person.  There was also some question as to whether the person was a “responsible person”, which was covered by Professor Timothy Todd on Forbes and can be found here.
  • Another attorneys’ fees case that probably would have ended differently had the client made a qualified offer.  In Mylander v. Comm’r, the Tax Court found that the taxpayer prevailed in the amount in controversy and the most significant issue, but the Service’s position was substantially justified.  The reasoning for this was because the case was complex and the taxpayer didn’t share all relevant facts or the case law for their claims.  I’m not sure how I feel about the complexity aspect or the onus being on the taxpayer to provide the applicable law  to the Service.  If the taxpayer’s position was clear, and reasonable research could have turned up the correct law, it seems unfair to make the taxpayer outline all relevant cases.  I hope those were only considered in conjunction with the missing facts, and wouldn’t have been sufficient on their own.  The Court did also mention that the current case was arguably distinguishable from the applicable prior holdings, so the Service’s position could have been somewhat reasonable no matter what.  All of this probably wouldn’t have mattered if the taxpayer had taken advantage of the qualified offer provisions (although if you make an offer, and fail to provide the IRS with the facts and the law, can you still prevail?).
  • SCOTUS has denied cert for Ford in its interest payment case involving the treatment of an advanced remittance.  Les has blogged this case twice before, most recently here.  In addition to the interest question, there was also a jurisdictional issue about whether the district courts could hear an interest disagreement or if it had to be determined by the Court of Federal Claims.  Les’ post outlines the issue and eventual court holding.
  • In Slone v. Comm’r, The 9th Circuit has decided another case on the two prong test necessary to establish a transferee is liable for the predecessor’s tax liability.  The court remanded for the tax court to review the transaction as to the first prong on federal law, but also held that the Service had to show it was a fraudulent transaction under the federal law and also had to independently show that the transferee was liable under the applicable state law.  This holding is in line with the various other recent cases, including Stern, Salus Mundi, and Diablod, which we most recently covered here.
  • Would you like to know how to file delinquent FBARs and not pay a penalty (i.e. are you mega rich and hiding money in some country with shady banking laws)?  Well, this probably doesn’t apply to you because you likely did not pay the tax due on those assets.  For those folks who paid the tax, but inadvertently failed to file the FBAR the IRS has issued updated guidance on filing late without penalties.
  • A res judicata case, which should have a familiar name for tax procedure junkies.  In Batchelor-Robjohns v. US, the 11th Circuit held the feds were barred by res judicata from raising the dead taxpayer’s income tax issues in an income tax audit when the same issue was previously litigated in an estate tax refund relating to same issue.
  • Just about a year ago, we covered Heckman v. Comm’r, where the Tax Court found the six year statute of limitations under Section 6501(e)(1)(A) applied to ESOP distributions that were not properly disclosed.  The Eighth Circuit has affirmed that ruling.  This is the link to the prior SumOp where we discussed the case.  In Heckman, the courts (Tax Court & 8Th Cir.) declined to incorporate other related entity returns to show disclosure for the individual’s return of the ESOP distribution.  It is interesting to compare that language to CNT Investors, another recent Tax Court statute of limitations case, which seemed to indicate the tax court would consider all the filings of the taxpayer and his related entities.  Although the tones are different, I do not think the holdings are necessarily in conflict.  In Heckman, there was not much disclosed that would adequately apprise the Service of the connection.  In CNT, a few key items were left off, but overall the filings painted a fairly full picture.

Litigating the Merits of a Trust Fund Recovery Penalty Case in CDP When the Taxpayer Fails to Receive the Notice

In Mason v. Commissioner the Tax Court issued a regular opinion as it decided for the first time the impact of taxpayer’s failure to receive her notice of the trust fund recovery penalty (TFRP) assessment.  The case provides a logical extension to the provisions allowing taxpayers to litigate the merits of an income tax liability following a failure to receive the notice of deficiency.  In addition to the extension of protection to TFRP assessment situations in which the taxpayer did not have a pre-CDP opportunity to contest the correctness of the TFRP assessment, this case merits discussion because it also raises the issue of the ability of the Tax Court to hear a TFRP case based on the date of the assessment and the treatment of the IRC 6320 notice as the notice required by IRC 6672.


The Court spends a good deal of time with the procedural issues in this case, which makes sense because on the merits the taxpayer had little to offer.  She founded the business and ran the day to day operations.  After spending several pages getting to the merits of the case, the Court very quickly dispensed with her claim that the 6672 liability did not apply to her.  I will spend no time discussing her merits issue and will focus on her right to raise it even if she had a very weak case.

The issue causing the Tax Court to report this case as a regular opinion arises from the failure of Ms. Mason to receive Letter 1153 giving her a chance to go to Appeals to discuss the imposition of the 6672 liability. The IRS mailed the letter to her address of record on September 2, 2005.

Although a certified mail label and return receipt were affixed to the envelope, postage was placed thereon with a private postage meter and the letter was posted without being presented to a U.S. Postal Service (USPS) employee. As a result, no USPS postmark was date-stamped on the envelope, nor was the item number on the certified label entered in to USPS certified mail tracking system. . . .  The unopened envelope, return receipt still attached, was received by the IRS on September 29, 2005, Petitioner did not receive the Letter 1153 or notification of its attempted delivery.

These facts give Ms. Mason just about the best position possible to argue that in a CDP hearing she did not have the chance to previously contest the liability, except that Congress did not explicitly contemplate this situation as it wrote the statute. Section 6330(c)(2)(B) provides that “[t]he person may also raise at the hearing challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.”  While Congress clearly signals that someone who fails to receive a notice of deficiency may raise the merits of the underlying liability in a CDP case, it did not talk specifically about liability situations outside deficiency proceedings.  It spoke vaguely about otherwise having an opportunity to dispute the liability.  What does that mean?

The 6672 liability does not use deficiency procedures as a predicate to assessment.  Since 1996, however, it does have very specific procedures the IRS must follow concerning notice provided in section 6672(b)(1) which states, “No penalty shall be imposed under subsection (a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212(b) or in person that the taxpayer shall be subject to an assessment of such penalty.”  While this provision closely mirrors the notice of deficiency language, it clearly differs from the notice of deficiency procedures.

Assuming the mailing was proper and given the fact that she did not receive the notice giving her a right to contest the assessment in Appeals, should she have the right to contest the assessment during a CDP hearing? The settlement officer (SO) working her CDP case told her she could not raise the merits of the TFRP assessment.  In the determination letter sustaining the IRS proposed levy, the SO reiterated the position that she could not raise the merits of the underlying TFRP assessment, citing to the attempted delivery of the Letter 1153 and Appeals consideration of her appeal of an offer in compromise.

The Tax Court showed great sympathy for her plight in trying to address the unpaid TFRP liability. I did not detail all of her efforts, which you can read in the opinion, but the Court characterized the process as follows:

One major reason for petitioner’s difficulty was that she had to deal with a different person for each type of procedure concerning the employment tax liability. At one point in the process she was dealing with as many as five of respondent’s representatives regarding different aspects of the same underlying tax liability: i.e., offers, installment payments, claim for refund, etc.  Respondent’s balkanized approach to collection procedures was also detrimental to respondent, because important dates and events were not being internally coordinated.  For petitioner, it presented Kafkaesque circumstances and confusion.

Not having read the brief filed by Chief Counsel, I cannot say if he argues that the TFRP situation bears fundamental differences from deficiency cases; he thinks that she deliberated failed to pick up the mail, triggering a different set of precedent discussed in the blog recently; he argues that the simultaneous CDP and refund hearing satisfied the prior hearing requirement or some other argument.  I would expect Chief Counsel’s office to agree with this opinion but it bears watching if he accepts this decision.

The Court did not buy whichever argument Chief Counsel sought to sell. Instead, it applied the same standard to this situation that applies when a taxpayer does not receive a properly addressed notice of deficiency.  In that situation the assessment, although valid, leaves the taxpayer with the opportunity to challenge because of the lack of receipt.

The Court noted that nothing in this record indicated that Ms. Mason chose not to pick up this mailing and, in fact, everything in the record supported the conclusion that she diligently pursued every opportunity given to her. The Court’s decision that she had the right to contest the merits of the TFRP liability in this CDP proceeding seems logical under both the language and the intent of the statute.  The IRS may not have contested this legal conclusion but only its application on these facts where it felt Ms. Mason had the opportunity to contest the liability previously.

In addition to the major holding of the case it contains two other holdings worth mentioning. The first concerns a minor matter of the Tax Court’s jurisdiction to hear a TFRP case and other non-deficiency procedure cases in the CDP context.  When Congress created CDP in 1998 it contemplated that CDP hearings would occur in the Tax Court for taxes assessed through the deficiency procedures and in District Court for taxes assessed though non-deficiency procedures such as employment taxes.  That bifurcation created unnecessary confusion and Congress amended the CDP provisions in 2006 to place all CDP cases under the jurisdiction of the Tax Court.  In making the change, it gave the Tax Court jurisdiction for determinations made after October 16, 2006.  Here the determination occurred on February 2, 2007 a few months after the effective date of the change in the law.  The change took place sufficiently long ago that few cases continue to require close scrutiny of the effective date but this one did.

The second issue worth noting concerns the phrase “otherwise have an opportunity to dispute” a tax liability. The phrase comes from IRC 6330(c)(2)(B), but the Code does not define the phrase.  The regulations define it by stating that it “includes a prior opportunity for a conference with Appeals.”  The definition in the regulations leaves open whether something else might also constitute an opportunity to dispute the tax liability.  In Lewis v. Commissioner, the Tax Court agreed with the regulation that the phrase included a prior opportunity to raise the issue at Appeals.  In Ms. Mason’s case she met with the SO on the CDP hearing and the appeal of a claim for refund at the same time.  For a more detailed discussion of the Lewis case and its interpretation of a “prior opportunity” to dispute the result of a previous administrative hearing, see When Can Taxpayers Challenge the Merits of the Underlying Liability in CDP Appeals: Why the Tax Court Was Wrong in Lewis v. Commissioner and its Progeny (Feb. 26, 2014).

The IRS argued at times that the simultaneous hearing gave her a prior opportunity cutting off her ability to petition the Tax Court on the merits of her liability.  The Court said that IRC 6330(c)(2)(B) contemplated a prior Appeals hearing and not a simultaneous one.  Therefore, the fact that Appeals considered the merits of the TFRP in the appeal of her claim for refund at the same time it considered her CDP request did not preclude her from raising the merits of the underlying assessment in the appeal to the Tax Court of the CDP determination.  While simultaneous hearings do not commonly occur, they do occur occasionally.  This decision will help those taxpayer should the IRS argue again that a simultaneous hearing on the merits cuts off rights in an appeal of the CDP determination.



Summary Opinions for 10/10/14

Summary Opinions only touches on a few items this week, but they are all interesting and somewhat important.  More jurisdiction questions, both in the whistleblower context and on failure to exhaust administrative remedies.  Plus interest abatement, penalty abatement, and more on the Elkins case and the Yari case.


  • Whistleblower cases are sort of like the IRS’s version of the Beatles’ Ringo songs.  Sort of quirky and entertaining, but not their best work.  If you have frequently read the Whistleblower opinions over the last few years, I think it would be understandable if you thought the Service was intentionally trying to thwart the program (were the Beatles trying to stop Ringo’s continued singing by giving him garbage?), or perhaps just incompetent (see Ringo’s singing), or nowhere near sufficient assets are allocated to the program (seems like the Beatles mailed a few of those Ringo songs in).  A recent Tax Court jurisdiction case, Ringo v. Comm’r, can be added to those prior cases.  In Ringo, the Service’s Whistleblower Office sent the petitioner a letter stating he was ineligible for an award under Section 7623, and not much else.  Petitioner disagreed, and appealed the determination to the Tax Court.  A few months later, the IRS sent a second letter saying, “just kidding, we are considering your claim”.  The Service then responded to the petition by filing a motion to dismiss for lack of jurisdiction, which Ringo did not oppose.  The Court, however, relying on law related to stat notices found that its jurisdiction is based on the facts at the time of the petition, and jurisdiction continues “unimpaired” until a decision is entered. (contrast this with CDP cases, which as Keith discussed here the parties can dismiss without the need for a decision) The Court found that the letter constituted a determination under Section 7623(b)(4), providing it with jurisdiction.

I think this is the correct result, and a good policy.  There could be negative implications in the Whistleblower context, and perhaps others, if the Court held the Service could divest the Court of jurisdiction simply by stating it was actually still reviewing the matter.  First, the Service could use this to prolong matters.  Second, and more troubling, the Service could start issuing such letters in all close situations, or even more broadly, so it wouldn’t have to deal with the matter until the taxpayer proved it was willing to go to court, or to attempt to thwart valid claims, only to retract the letter once the matter goes to court. In Ringo, none of this seems to have mattered much, because the petitioner appears to not have objected to the dismissal of the case, but other’s may want to force the issue, and it is better to not have a holding stating the Tax Court lacks jurisdiction.  For a far more succinct recitation of the facts and holding, check out Prof. Tim Todd’s write up on the Tax Litigation Survey blog.  Lew Taishoff also has a good post on the case found here.

  • The Tax Court had an interesting interest abatement holding in Larkin v. Comm’r.  I found two aspects interesting, and the case a little challenging to work through.  The quick facts; an incorrect overpayment in a later year was due to an incorrectly carried forward NOL, which should have been carried back.  The taxpayer amended the returns, resulting in a liability in the later year, and a larger overpayment in the prior carryback NOL year. Initially, my mind jumped to interest netting, which gets to the first interesting aspect of the case.  One argument the taxpayer made was that the Service failed to credit the prior year overpayment against the later year liability, as requested, and instead issued a refund, which it thought would have negated interest on the later year’s underpayment.  The Court found this argument moot, although the Service did not.  The Court stated, “[i]t appears that both parties may have assumed that a credit…would, no matter when it was administratively credited against the [later] liability, have been treated as if it had been paid at least as early as the due date of the [later return] and would therefore have precluded the accrual of any interest…But that is not the case.”  The Court looked to Section 6601(f) relating to the satisfaction of tax by credit, which it found precluded the erroneous assumption.  I have not had time to review this, so I am not saying the Court was correct on this point.  The main text of the holding does not fully flesh the point out, but I think Footnote 8 helps to explain the Section 6601(f) issue, stating:

Under section 6611(f)(1), for interest purposes the overpayment of 2003 tax was “deemed not to have been made prior to the filing date for” the loss year (2005), i.e., not before April 2006; and under subsection (f)(4)(B)(i)(I), the 2003 overpayment was “treated as an overpayment for the loss year”, i.e., for 2005. However, under subsection (f)(4)(B)(i)(II), the return for the loss year (2005) was treated as if “not filed before claim for such overpayment is filed”, i.e., in May 2008. That is, the 2003 overpayment was deemed to arise in April 2006, when the 2005 return was due; but the 2005 return (due in April 2006) was treated as not filed before May 2008 (and therefore as late), and the refund was made less than 45 days thereafter on July 9, 2008.

 The second major point I found interesting was the Court’s review of ministerial acts for abatement under Section 6404.  The taxpayers claimed that the IRS gave them erroneous advice regarding amending a different year, which was incorrect and the return was not processed.  The taxpayers claimed this caused delay in proper filing, resulting in interest.  The Court noted some evidentiary issues that made the taxpayers’ claim fail, but also stated that direction regarding amending prior returns, at least in this case, were “providing an interpretation of Federal tax law” which was not a ministerial or managerial act subject to Section 6404 abatement.

  • I’m not certain who is the “Chief Idea Guy” at Procedurally Taxing; probably Keith, maybe Les, definitely not me.  If we had such a position, our ideas would generally be tax related – at least the good ones.  In Suder v. Comm’r, that was not the case for Mr. Eric Suder who was CEO and CIG of his company Estech Systems.  His good ideas had something to do with telephones.  Not tax planning. Estech did some incorrect research credit tax planning, which resulted in an underpayment, which the Service assessed accuracy related penalties on.  The taxpayer argued reliance on a professional, and honest misunderstanding of law.  The reliance holding was fairly straightforward.  It is, however, less frequent that you see a misunderstanding of the law argument successfully made.  The Court held that the taxpayer had an honest misunderstanding of the tax law related to reasonable compensation under Section 174(e), which was reasonable under the facts and circumstances, and that this area was very complex.  It did seem like some of the pertinent facts and circumstances were that they relied on their longtime accountant to provide them with their misunderstanding, which makes it overlap with professional reliance.
  • In US v. Appelbaum the District Court for the Western District of North Carolina had the opportunity to review various procedural issues in a case involving Section 7433 damages claim following the Service attempting to claim Section 6672 penalties for not paying over a bankrupt company’s taxes.  Mr. Appelbaum, like almost all applicants for damages under this Section, failed to exhaust the administrative remedies under Section 7433, which allowed the District Court to provide its opinion on whether or not that requirement was jurisdictional.  Following Galvez and Hoogerheide, the Court found it was not a jurisdictional requirement, but failing to comply with the statute resulted in the taxpayer failing to state a claim upon which relief could be granted.  Regarding the counterclaim, it appears the taxpayer alleged latches, but not as some sort of equitable argument regarding the Section 7433.   I was initially excited to see “equitable” language following a determination that failure to exhaust administrative remedies was not jurisdictional (Courts don’t usually get to whether an equitable argument could prevail).  Unfortunately, it was a separate claim, which makes sense, since latches would not be the first equitable argument you would think should apply in that context.
  • Jack Townsend’s thoughts on the Elkins’ art valuation case can be found here.  We touched on that in the last SumOp, and this case is popping up everywhere.  Jack has a great discussion regarding burden of proof, which should be reviewed.  I’m thrilled that my family has a way to discount the value of our Star Trek commemorative plates.  The estate tax on those was going to be a bear when my folks died.
  • More on the Yari case, which considers the 6707A penalty in the context of an amended return; Les previously blogged on the case here.  This content is from David Neufeld, and was reproduced from the Leimberg Information Services, Inc. tax newsletter. In the post, Neufeld takes aim at the Tax Court holding in the case, and makes a spirited argument in favor of the taxpayer’s view that the penalty should be pegged to the amended return, and not the original filed return.

Postponing Assessment and Collection of the IRC 6672 Liability

IRC 6672 imposes a personal liability on those responsible for collecting and paying over to the IRS taxes held in trust. This liability goes by several names including “Trust Fund Recovery Penalty” (TFRP); 100% Penalty; and Responsible Officer Penalty. 

The code section sits in the assessable penalty chapter of the Internal Revenue Code but the Supreme Court has determined that this liability does not have the characteristics of a penalty for bankruptcy purposes. The Third Circuit has held that this liability does not have the same unlimited assessment period as other assessable penalties. (If you click on the link to the case, it will quickly become clear why the taxpayer won when you notice who was representing the taxpayer in that case.) The IRS has said that this liability does not have the same collection rules as other penalty assessments and that it will only collect the liability once even though assessments exists against multiple persons. 



The policy statement creates an interesting situation when the IRS “over collects” this liability by obtaining payments from more than one responsible person in a total amount that exceeds the liability. For example, assume that ABC Inc. fails to pay $100 of collected taxes. The IRS assesses three responsible persons, Mr. A; Mr. B; and Mr. C, $100 each for this failure. On September 1, three different revenue officers each succeed in collecting $100 from the responsible officers. One collects from Mr. A at 10:00 AM; one from Mr. B at 11:00 AM and the third from Mr. C at 1:00 PM. 

What will the IRS do with the “extra” $200 it has collected? It will return the money to Mr. B and Mr. C and keep the full amount paid by Mr. A. While this practice seems shortshigted because it encourages responsible persons not to pay, it creates opportunities for the responsible officer who understands this practice to seek to insure that one of the other responsible officers pays first. 

How does a responsible officer seek to insure the other responsible officers pay first – by slowing down the assessment and collection process against himself and by aiding the IRS in collection from the others. In seeking to slow down the assessment and collection process, a representative must take care to avoid restrictions in Circular 230 on inappropriate delay. 


It deserves note that the IRS does an excellent job of slowing down assessment without any assistance. On average, it takes the IRS about 21/2 years after the corporation’s failure to pay the trust fund taxes before the IRS makes assessments against responsible individuals. Of course, any given responsible officer wants his assessment to occur later than the assessments against other individuals also responsible for the same tax no matter how long the IRS takes on average. 

It also deserves noting that delaying the assessment benefits a responsible officer even if the IRS ultimately collects from him because interest on the liability does not start until the assessment occurs. (The link takes you to a law review article I wrote several years ago explaining the inappropriateness of the beginning point for the running of interest.) Delaying assessment postpones the day on which interest begins as well as the day on which the failure to pay penalty begins. So, the strategy of delaying assessment reaps multiple benefits under the current, seemingly misguided, system. 

Aside from avoiding or stalling the revenue officer during the investigative stage, a tactic not condoned by Circular 230 and not recommended here, availing yourself of all opportunities to appeal the proposed assessment presents itself as the simplest way to delay assessment. 

Another change in 1996 was the establishment of a process granting an automatic right to go to the Appeals Division to contest a proposed TFRP assessment. The proposed responsible officer who avails himself of this opportunity rather than consenting to assessment or failing to appeal, will delay the assessment, assuming the person cannot persuade the IRS not to make the assessment, for the length of time the case sits in Appeals. The period of time a case sits in Appeals could be fairly long – certainly a time measured in months if not years. Meanwhile, maybe the IRS will have already collected the liability from another responsible person. 


Once the IRS assesses the liability, it will send Notice and Demand followed by other letters leading up to the Notice of Intent to Levy and the offer of Collection Due Process (CDP) rights. A responsible officer trying not to be the first to pay will not voluntarily pay in response to the IRS correspondence and will request a CDP hearing. Here is another chance to sit in Appeals inventory, assuming your client qualifies for a CDP hearing and is not precluded by IRC 6330(f)(3). for several months while the IRS maybe collects from the other responsible officers. 

CDP also creates the opportunity to go to Tax Court if a satisfactory collection alternative is not reached with the Settlement Officer. The time spent in Tax Court trying to reach an appropriate collection resolution gives more opportunity for the IRS to collect the liability from the other responsible officers. 

Aiding the IRS 

The IRS policy of keeping the first money it receives creates its own mini-whistleblower statute for responsible officers. These individuals frequently know each other’s finances very well. If they provide information to the revenue officer allowing easier collection of the liability form another of the responsible officers that can enhance the likelihood that the first one to pay will be the other person. The situation might be likenedto the children’s story of the three billy goats crossing the bridge each one telling the troll to wait for the next because the next one is better. 


I think the IRS collection policies in this area create improper incentives as I have discussed in the articles linked above. It does not make sense to me from a tax administration standpoint to incentivize taxpayers to not pay or delay paying their taxes. The statute should charge interest from the moment the underlying liability arises and should give benefits to persons paying first rather than last. Nonetheless, since Congress and the IRS have created a system where a taxpayer can win by delaying, it is important to understand the incentives the system uses and work with them to the benefit of your client within the structures of the ethical rules. Paying last can subject the responsible officer to a suit from the person who does pay the trust fund taxes and another post will talk about that potential liability and the unanswered questions there.