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.

Trust Fund Recovery Penalty Case Wins a Remand in Prior Opportunity CDP case

In the case of Barnhill v. Commissioner, 155 T.C. 1 (2020) the Tax Court determined that the taxpayer never received the letter from the IRS scheduling the conference to dispute the Trust Fund Recovery Penalty (TFRP).  Because the taxpayer did not receive that letter, the taxpayer did not have a prior opportunity to dispute the merits of the TFRP.  Because the Settlement Officer in the Collection Due Process case refused to hear the merits of the TFRP based on the position that the taxpayer had a prior opportunity to dispute the TFRP in Appeals, the Tax Court remanded the case to Appeals to give the taxpayer an opportunity to contest the merits.  Bryan Camp wrote an excellent post on this case which you may want to read instead of this one, but I will try to cover slightly different ground.


The Barnhill case arose in Richmond, Virginia.  I had lunch with Mr. Barnhill’s attorney not long after the opinion was issued.  He indicated that after the opinion, the parties reached a basis for settlement and described the settlement to me.  The Tax Court docket sheet does not yet reflect a settlement but sometimes the settlement of a case can move slowly and particularly now.  The settlement shows the benefit of CDP in a way that we do not talk about often and the prior opportunity aspect of this case stands in contrast to another TFRP case involving prior opportunity now pending before the 4th Circuit.

Mr. Barnhill requested a hearing with Appeals to talk about the imposition of the TFRP against him.  He felt and his ultimate settlement suggests that the TFRP proposed against him was too high.  For reasons unknown he did not receive the invitation to the hearing offered by Appeals.  Because he did not respond to the offer of the hearing, Appeals quite rightly recommended the assessment move forward, which led to the filing of the notice of federal tax lien which led to his request for a CDP hearing. 

Because this is a TFRP case with a divisible tax at issue, Mr. Barnhill had a way to get into court to contest the liability without having to full pay the liability.  He did not face the same mountain of full payment faced by Lavar Taylor’s clients who tried without success to use CDP to resolve the merits of their tax liability as we discussed here, here and here.  Even without the full payment barrier, however, litigation in district court costs much more than litigation in Tax Court in almost every case and certainly more than an administrative hearing.  CDP offered him the chance to have his administrative hearing that he missed.  Once he missed the pre-assessment administrative hearing with Appeals, CDP provided, by far, the cheapest way for him to resolve his dispute over the liability.  It also provided the cheapest way for the IRS to resolve the dispute.

Not every taxpayer has a meritorious argument that the assessed amount overstates the correct liability.  I understand the desire to limit the use of Appeals resources and Counsel resources if a high percentage of cases seeking a merits review lack any merit.  I have no empirical evidence but do not believe that the majority of cases seeking a merits adjustment lack a basis for such an adjustment.  The IRS does taxpayers, and in many cases itself, a disservice by imposing regulations that limit the opportunity to come into Appeals in the CDP context and limit the opportunity to litigate in Tax Court.  Viewed through the lens of taxpayer rights, it has regulations that do not provide taxpayers with their full rights.  This is particularly true in cases with high dollar assessable, non-divisible penalties, but also applies in situations where a simple administrative visit could resolve a matter that otherwise requires expensive district court litigation.

Assuming the information provided to me that the Barnhill case has settled for an amount substantially lower than the assessed amount is correct, the case stands as an example of the benefit of CDP merits opportunities.  Instead of working hard to limit those opportunities, the IRS should reexamine its regulations, perhaps armed with empirical evidence I do not have, and create a better system than exists today.

This leads to the contrast between what has happened in Barnhill and what happened in a CDP case stemming from an Automated Underreporter assessessment, the Zhang case.  Zhang was decided by designated order rather than precedential opinion and was blogged by Caleb Smith here.  Like Mr. Barnhill, Mr. Zhang did not have a pre-assessment hearing with Appeals and sought to raise the merits of his assessment in a CDP case.  The facts in the Zhang case, however, differed slightly and that difference caused the Tax Court to deny him the opportunity to go back to Appeals to work out the issue.  As a result, he decided to take his case into the 4th Circuit (docket no. 20-01453) rather than to start over through the refund route (a route still theoretically open to him should he lose on appeal.)

Among other things, the Zhang case reinforces the importance of the Tax Court’s orders.  While the Barnhill case ends up as a precedential opinion, the Zhang case flies under the radar as an order, albeit a designated one.  In Mr. Zhang’s case he alleges that he did not receive the statutory notice of deficiency.  In most cases, but see the discussion on Landers here, that would afford Mr. Zhang the opportunity to have a hearing with Appeals regarding the merits of the assessment.  Mr. Zhang made a timely CDP request after receiving a notice of intent to levy and asked to discuss the merits of the assessment; however, the individual in Appeals handling his case for some reason did not consider the merits.  The Tax Court seemed to acknowledge that the Appeals mishandled this CDP hearing; however, Mr. Zhang did not petition the Tax Court after receiving the determination letter in this case.

He later received a notice of federal tax lien which caused him to file another CDP request.  He again sought to raise the merits of the assessment.  Here, he gets caught in a Catch-22 situation.  Appeals says maybe we should have listened to you last time, but that time serves as a prior opportunity and it’s too late to raise the merits now.  The Tax Court agreed with Appeals on this point.  The 4th Circuit will have an opportunity to rule on the outcome.

IRS – is this what you want?  Your mistake led the pro se Mr. Zhang to the wrong place and now you are arguing that because the pro se Mr. Zhang did not appeal your mistake he is out of luck on having a prepayment forum to fix his liability.  Yes, he could try audit reconsideration but why make him do that?  His case is an AUR case.  It should be relatively easy to determine if you agree.  Here is the maddening part of prior opportunity, and the game the IRS wants to play with it.  Let’s figure out a way to resolve these cases at the administrative level and not force people into court unnecessarily, particularly when the mistake started with the agency and not the individual.

Mr. Barnhill’s result shows the redeeming feature of CDP.  Mr. Zhang’s case shows the maddening aspect of how it is administered in some cases.  We can make it better.

Injunctions as a Tool to Prevent Pyramiding of Employment Taxes

Christine and I just returned from the ABA Tax Section May meeting.  In this brief post I want to flag an issue that DOJ attorney Noreene Stehlik and Chaya Kundra discussed at an Employment Tax panel entitled “Employment Tax Liabilities and IRS Collections” as well as a case that the Civil and Criminal Tax Penalties committee flagged. In the employment tax panel, the panelists discussed the various tools that DOJ and IRS have to go after employers who pyramid employment tax liabilities by withholding taxes from employees but then failing to remit the taxes to the government.


Section 6672 allows the government to pierce the corporate veil and creates personal liability for delinquent employment taxes. Keith has written extensively about Section 6672 (see here). The ability to go after people in their individual capacity is powerful. Yet IRS and DOJ have been proactive in using even harsher tools to combat repeat offenders. That has included an uptick in criminal prosecutions and using injunction suits against the employer, owners or principal officers of delinquent employers.

In the last few years there have been a handful of employment tax injunction cases that have led to orders discussing the practice and power that the government has to use injunction as a remedy in this context. The statutory hook is Section 7402(a), which authorizes district courts to take a number of measures related to the enforcement of the internal revenue laws, including enjoining taxpayers from taking future conduct or requiring that taxpayers do specific acts.

While courts have long had this power, and IRS and DOJ have used it over the years, its use is growing. Last fall Keith drafted a new subchapter in Saltzman and Book Chapter 14A discussing the issue.  There are no statutory guidelines or time limitations for a civil injunction. The terms could last indefinitely, and the relief requested could be narrowly tailored or rather broad.

The new subchapter discusses the differing approaches district courts have taken, with some courts requiring  the government prove that it meets traditional standards for equitable relief, and other courts not starting the analysis from traditional equitable factors but considering whether the relief is appropriate for the enforcement of the laws in light of the statutory language in Section 7402(a).

Also at the meeting last week the Civil and Criminal Penalties Committee panel discussed a court order from earlier this year that did not grant injunctive relief in connection with multiple years of employment tax noncompliance. In US v Askins and Miller Orthopaedics, the Middle District of Florida denied the government’s request for injunctive relief (as an aside there seem to be a lot of doctor and dentist cases involving employment taxes); the request for injunctive relief was both broad (stating that the key individuals would be responsible for filing and paying on time) and specific (for example, detailing payment schedules and permitted ways for payroll processing companies to be involved to assist in meeting obligations). For over eight years the government had made numerous attempts to bring the practice into employment tax compliance. The order discusses the futility of levies, the apparent diversion of funds to an account that funded a private hunting club and allegations of a failure to disclose all bank accounts. Noting that the  collection efforts failed, the district court still did not grant the relief requested. In finding against the government, the court looked to traditional standards that would justify equitable relief, i.e., the government had to show absence of an alternate adequate remedy and the likelihood of suffering irreparable injury of denied relief.  That, in the courts view, cut against the injunction, as the government was bringing its traditional collection case for a money judgment for the unpaid taxes.

While the court sympathized with the government’s challenges in the past and its argument that it would have a difficult time collecting, that was not enough, as the order leaned heavily on the government’s ability to fashion a remedy in line with other creditors’ rights:

Bringing an action to recover money damages `does not entitle the claimant to equitable relief simply because the complaint alleges uncertainty of collectibility of a judgment if a fund of money is permitted to be disbursed. The test of the inadequacy of a remedy at law is whether a judgment could be obtained, not whether, once obtained it will be collectible.’ (citation omitted).


As we discuss in Saltzman and Book, even when courts do not rely on a traditional approach under equity to determine when an injunction is warranted, the government’s power is not unlimited.  I am sympathetic with the government in these cases, especially when there are pyramiding liabilities and repeated unsuccessful attempts to encourage voluntary compliance and efforts to defeat collection. Employment tax noncompliance is a major systemic problem, and the threat of contempt seems proportionate in light of repeat offenders who are tempted to view employment tax funds as a source to keep businesses afloat and who take affirmative steps to defeat collection.

We all suffer when employment taxes pile up, and it seems that this stubborn problem is need of more robust powers that are short of criminal prosecution but have more teeth than traditional collection suits.

Fast Track Mediation for Collection

In Rev. Proc. 2016-57 the IRS announced a new fast track mediation specifically designed for collection cases (FTMC).  The program will allow taxpayers with issues in offer in compromise (OIC) cases and trust fund recovery penalty (TFRP) cases to go to a mediator in Appeals to try to resolve an issue in their case which could provide the basis for overall resolution if the parties could reach agreement on that issue.  I do not know how much demand exists for this type of mediation, but the effort to provide mediation in these fact intensive situations seems like an idea worth trying.


The Rev. Proc. points out that fast track mediation for SBSE cases has existed as a possibility since 2000 and the program included collection cases; however, mediation occurred in only a small number of collection cases.  In 2011 the IRS introduced fast track settlement for examination cases but that initiative did not include collection cases.  The idea for use of Appeals in FTMC does not include giving the Appeals employee settlement authority but rather to have them serve as a mediator acting as a neutral party to assist the taxpayer and the collection function in reaching agreement on a point of dispute.

Collection and Appeals will jointly administer the FTMC program.  Because SBSE handles all of the collection cases for the IRS, taxpayers falling into any of the stovepipes into which the IRS divided itself in 2000 can use FTMC.  The IRS envisions that FTMC will take place “when all other collection issues are resolved but for the issue(s) for which FTMC is being requested.  The issue(s) to be mediated must be fully developed with clearly defined positions by both parties so the unagreed issues can be resolved quickly.”  To use FTMC, both the IRS and the taxpayer must agree.  Neither party can force the procedure on the other.

The Rev. Proc. provides a list of issues in OIC and TFRP cases for which it contemplates FTMC use.  It does not state whether the list provides the exclusive opportunities for use of FTMC but the manner in which the Rev. Proc. is written makes me believe that engaging in FTMC for issues not on this list will rarely, if ever, occur.  For OIC the list includes the following issues:

  • Valuing the taxpayer’s assets, including those held by third parties;
  • Determining the amount of dissipated assets that the IRS should include in the reasonable collection potential (RCP) calculation;
  • Deciding whether the facts warrant a deviation from the national or local expense standards;
  • Determining the taxpayer’s proportionate interest in jointly held property;
  • Projecting the amount of future income based on projections other than current income;
  • Calculating the taxpayer’s future ability to pay when the taxpayer lives with and shares expenses with a non-liable person;
  • Evaluating doubt as to liability cases worked by Collection, e.g., a case involving TFRP; and
  • A catch-all provision that uses as an example whether a taxpayer’s contributions to a retirement savings account are discretionary or mandatory.

The TFRP list includes the following issues:

  • Whether the person meets the test as a “responsible person” of the business that failed to pay over the trust fund taxes;
  • Whether the person willfully failed to pay over the collected taxes or willfully attempted to evade or defeat the payment; and
  • Whether the taxpayer properly designated a payment.

The Rev. Proc. explains when FTMC will not apply:

  • To determine hazards of litigation or use the Appeals Officer’s settlement authority;
  • For cases referred to the Department of Justice (remember that once a case is referred to the Department of Justice settlement authority resides with the DOJ and while DOJ case refer a matter back to the IRS to obtain the views of the IRS, DOJ has total control of the outcome of the case);
  • For cases worked at an SB/SE Campus site (because almost all OIC cases are worked at campus sites in Brookhaven and Memphis, I assume that this statement in the Rev. Proc. does not apply to the OIC units but the Rev. Proc. does not make this 100% clear. To my knowledge TFRP cases are worked by Revenue Officers assigned to field units and this restriction would not have much impact on TFRP cases.  So, I am having trouble understanding what this restriction covers)
  • To cases in the Collection Appeals Program (OIC cases should not use the CAP program and TFRP cases would only get to the CAP program after the assessment of the TFRP and not before the determination of the liability exists. So, this exclusion would not seem to have much impact);
  • To Collection Due Process cases (this restriction could have a significant impact in the OIC context because many practitioners submit offers during the CDP process. I prefer to submit offers during a CDP case over submitting them outside of CDP.  It is not clear to me why the IRS would exclude offers submitted during a CDP case unless it assumes that the Appeals employee assigned to the CDP case could or would serve this function.  My experience is that the Appeals employee plays a relatively tradition role in CDP cases and does not get involved during the consideration of the offer by the offer unit.  To the extent that having a mediator provides a useful function, it seems that the mediator could assist in an offer arising during a CDP case just as the mediator could assist in other offers);
  • To cases in which the IRS determines the taxpayer has put forward a frivolous issue whether or not the issue makes the list in Rev. Proc. 2016-2 (this makes sense given that either party can nix the use of a mediator and the IRS position here just puts down a marker that it will not go to mediation on something it considers frivolous);
  • To cases in which the taxpayer has failed to respond to IRS communications or to submit documentation (the IRS does not want to use FTMC to allow the taxpayer to stall);
  • To OIC cases involving Effective Tax Administration offers except in limited circumstances, to cases in which the taxpayer refuses to amend the offer yet provides no specific disagreement, to cases in which the IRS has explicit guidance and to cases in which Delegation Order 5-1 requires a level of approval higher than a group manager (almost all of these exceptions involving reasons for which the IRS would not agree to FTMC on an individual case basis and just set out markers so the taxpayer would know in advance);
  • To cases where FTMC use would not be consistent with sound tax administration; and
  • To issues otherwise excluded in subsequent guidance.

A taxpayer can request FTMC after full development of an issue and before Collection makes its final determination.  The IRS has created Form 13369 for use in requesting this process.  Both the taxpayer and the IRS must sign the firm in order to invoke the procedure.  In addition to the form the taxpayer submits a written summary of their position with respect to the disputed issues and the IRS will submit a written summary as well.  Once the parties have prepared the form and the statements, Collection sends the package to the appropriate Appeals office.  The Appeals office decides whether to accept the case for FTMC.  The taxpayer must consent to disclosure of their tax information to participants in the mediation and does this in signing the Form 13369.

The Rev. Proc. goes on to describe the manner of the mediation as well as the post-mediation process.  If the mediation succeeds, it should allow the OIC or the TFRP case to move forward to resolution by removing a roadblock to agreement.  If it does not succeed, the taxpayer still retains the right to appeal the denial of the OIC or to appeal the proposed determination of the TFRP.  In this regard, the mediation seems to have little downside for the taxpayer except to the extent the denial of the mediation is perceived to have solidified the view of Appeals and keep the taxpayer from having a productive Appeals conference at a later stage.    Because I have never used mediation, I have no basis for forming an opinion of the likely success of this new process.  Perhaps those who have used it in the Examination context can comment on how it might work in these two specific collection situations.  I suspect that training of IRS employees to spot situations in which it might assist and to have open minds about using the process will have a high impact on its success.  If the employees considering OICs or TFRP assessments would prefer to move the case to Appeals in a more traditional manner than to have a mediator from Appeals intervene in their cases, the program will not succeed.


Report on Trust Fund Recovery Penalty Procedures

The Treasury Inspector General for Tax Administration (TIGTA) issued a report on June 30, 2016, detailing IRS procedures for processing trust fund recovery penalty (TFRP) cases.  The report contains statistics on the number of TFRP cases, the amounts at issue in these cases and the timeliness of the IRS response in these cases.  In general, the report paints a picture of an agency moving fairly slowly to collect a liability that involves the misuse of funds held by these individuals in trust.  As I have mentioned in prior post involving the TFRP, I have written three law review articles on TFRP concerning the way the IRS charges interest and posts payments, some practices the states use to collect unpaid trust fund taxes and the disclosure of the returns containing the information about the money held in trust. This TIGTA report does not directly address any of the issues on which I have written law review articles and I realize that I should not have an expectation that anyone would read the article.  The report does show that the IRS continues to struggle to get in front of the collected tax issue.


The struggle to timely pursue unpaid collected taxes is hampered by the diminution in the ranks of revenue officers.  The response to the report by SBSE Commissioner Karen Schiller states that between 2010 and 2015 the number of revenue officers dropped by almost 40%.  Because TFRP cases require investigation by revenue officers if the number of businesses continues to grow, or even remain stable, this level of drop off in the number of investigators has to have an impact.  The response to the report also cites to a new program Collection has adopted concerning the failure of businesses to pay over collected taxes.  That program seeks to contact the business that fails to pay over collected taxes almost immediately in order to keep the business from incurring the type of debt that would lead to the necessity to begin a TFRP investigation.  The TIGTA report does not discuss the new program because the program has had insufficient time to demonstrate its worth and it started after the period covered by the TIGTA report.  We discussed the announcement of that program made in December of 2015 in a prior post.

The TIGTA report contains several useful graphs for those interested in TFRP.  The first concerns the number of assessments and the amount assessed.  Predictably, the number of assessments has declined; however the amount assessed has slightly risen over that period.  The rise in the amount assessed may reflect that by the time the IRS gets to a case more quarters of unpaid liability exist but neither the narrative nor the chart attempt to explain the slight increase.  The first finding of the report concerns the timing of the assignment of the TFRP case vis a vis the timing of the work on the underlying business entity that fails to pay over the collected taxes.  The TFRP should happen when the IRS cannot collect the unpaid taxes from the entity or, in some cases, to motivate the business to pay the taxes.  Yet, the assignment of a revenue officer to investigate the business did not smoothly result in the assignment of the same revenue officer to investigate the TFRP.  For some reason the IRS not only does not assign a revenue officer to perform both functions at more or less the same time but took, on average, about 15 months to assign a case for TFRP investigation after it had assigned someone to look into the failure of the business to pay the collected taxes.

The delay in assigning someone to work the TFRP case negatively impacts the ability to ultimately collect the liability.  In a study done by the National Taxpayer Advocate about which she testifies before Congress, which the TIGTA report cites, collection potential goes down as much as 50% from the first year to the second and 30% from the second to the third.  TIGTA recommends that the IRS assign the same revenue officer to work the TFRP who it assigns to work the delinquent business account.  This seems like a recommendation that covers a practice the IRS would have adopted decades ago and not one present today.  While the IRS agrees to the recommendation, it notes that barriers to its implementation exist.  This surprises me.  In a time of limited resources, if not before, it seems that the IRS should work the TFRP simultaneously with working the delinquent account.  Maybe the new initiative to contact businesses as soon as a delinquency occurs will cut down on the problem but I cannot imagine that the need for performing TFRP assessments on a fairly large scale will go away simply based on contacting the business sooner.  So, the IRS needs to continue looking for ways to improve its performance in assessing and collecting the TFRP.  This suggestion by TIGTA seems like a no brainer.

The other focus of the report concerned filing the notice of federal tax lien (NFTL).  Not only is the IRS slow to do the TFRP investigation but it then moves slowly to file the NFTL.  In many of these cases the amounts meet the current criteria for filing the NFTL.  The failure to file the NFTL leaves the IRS vulnerable to other creditors obtaining a priority in the responsible person’s assets.  Sometimes the IRS will need to back away from filing the NFTL in order to allow the taxpayer to get funds with which to pay back the tax liability but the decision to file or not file the NFTL should occur at or near the time of the assessment and not over a year later.  Again the IRS agreed with the concept but had excuses for why it could not happen or at least could not happen in the short term.  Like the suggestion that the same person work the business account and the TFRP investigation, this suggestion seems like a problem that the IRS should have fixed long ago.

The TIGTA report deserves a quick read for those interested in the inter-working of the IRS on TFRP.  Unless the new program has a more dramatic impact than I envision, the problems collecting trust fund taxes will continue.  The TIGTA report gives me little hope that the IRS will soon solve the mystery of collecting from those who have collected for it and failed to pay over.

Summary Opinions — Catch Up Part 1

Playing a little catch up here, and covering some items from the beginning of the year.  I got a little held up working on a new chapter for SaltzBook, and a supplement update for the same.  Both are now behind us, and below is a summary of a few key tax procedure items that we didn’t otherwise cover in January.  Another edition of SumOp will follow shortly with some other items from February and March.


  • In CCA 201603031, Counsel suggests various procedures for the future IRS policy and calculations for the penalty for intentional failure to file electronically.  The advice acknowledges there is no current guidance…I wrote this will staring at my paper 1040 sitting right next to my computer.  Seems silly to do it in pencil, and then fill it into the computer so I can file electronically.
  • This item is actually from March.  Agostino and Associates published its March newsletter.  As our readers know, I am a huge fan of this monthly publication.  Great content on reducing discharge of indebtedness income and taxation.  Also an interesting looking item on representing real estate investors, which I haven’t had a chance to read yet, but I suspect is very good.
  • The IRS has issued a memo regarding its decision to apply the church audit restrictions found under Section 7611 (relating to exemption and UBI issues) to employment tax issues with churches also.
  • Panama Papers are all the rage, but I know most of you are much more interested in Iggy Azalea’s cheating problems (tax and beau).  Her Laker fiancé was recorded by his teammate bragging about stepping out and she had a sizable tax lien slapped against her for failure to pay.  She has threatened to separate said significant other from reproductive parts of his body, but it appears she has approached the tax debt with a slightly more level head, agreeing to an installment agreement.
  • I’m a rebel, clearly without a cause.  I often wear mismatched socks, rarely take vitamins, and always exceed the speed limit by about 6 MPH.  But, professionally, much of my life is about helping people follow the rules.  In Gemperle v. Comm’r, the taxpayers followed the difficult part of the conservation easement rules, and obtained a valid appraisal of the value, but failed to follow the simple rule of including it with his return.  Section 170(h)(4)(B)(iii) is fairly clear in stating the qualified appraisal of the qualified property interest must be included with the return for the year in question.  And, the taxpayers failed to bring the appraiser to the hearing as a witness, allowing the IRS to argue that the taxpayer could not put the appraisal into evidence because there was no ability to cross examine.  In the end, the deduction was disallowed, and the gross valuation misstatement penalty was imposed under Section 6662(h) of 40%.  The Section 6662(a) penalty also applied, but cannot be stacked on top of the 40% penalty pursuant to Reg. 1.6662-2(c).  The Court found that there was no reasonable cause because the taxpayer failed to include the appraisal on the return, so, although relying on an expert, the failure to include the same showed to the Court a lack of good faith.  Yikes! Know the rules and follow them. It is understandable that someone could get tripped up in this area, as other areas, such as gift tax returns, have different rules, where a summary is sufficient (but perhaps not recommended).
  • The Shockleys are fighting hard against the transferee liability from their corporation.  Last year we discussed their case relating to the two prong state and federal tests  required for transferee liability under Section 6901.  In January, the Shockleys had another loss, this time with the Tax Court concluding they were still liable even though the notice of transferee liability was incorrectly titled and had other flaws.  Overall, the Court found that it met and exceed the notice requirements and the taxpayer was not harmed.
  • The Tax Court, in Endeavor Partners Fund, LLC v. Commissioner, rejected a partnership’s motion for injunction to prevent the IRS from taking administrative action against its tax partner.  The partnership argued that allowing the IRS to investigate the tax matters partner for items related to the Tax Court case (where he was not a party) would “interfere with [the Tax] Court’s jurisdiction” because the Service could be making decisions on matters the Court was considering.  The Court was not troubled by this claim, and held it lacked jurisdiction over the matters raised against the tax matters partner, and, further, the partnership’s request did not fall within an exception to the Anti-Injunction Act.
  • Wow, a financial disability case where the taxpayer didn’t lose (yet).  Check out this 2013 post by Keith (one of our first), dealing with the IRS’s win streak with financial disability claims.  Under Section 6511(h), a taxpayer can possibly toll the statute of limitations on refunds with a showing of financial disability.  From the case, “the law defines “financially disabled” as when an “individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment … which has lasted or can be expected to last for a continuous period of not less than 12 months,” and provides that “[a]n individual shall not be considered to have such an impairment unless proof of the existence thereof is furnished in such form and manner as the Secretary may require.””  I’ve had some success with these cases in the past, but I also had my ducks in a row, and compelling facts.  So, not something the IRS would want to argue before a judge.  The Service gets to pick and choose what goes up, which is why it wins.  In LeJeune v. United States, the District Court for the District of Minnesota did not grant the government’s motion for summary judgement, and directed further briefing and hearing on whether the taxpayer’s met their administrative requirements.
  • Another initial taxpayer victory, which could result in an eventual loss, but this time dealing with TFRP under Section 6672.  In Hudak v. United States, the District Court for the District of Maryland dismissed the IRS’s motion for summary Judgement, finding that a jury could determine that a CFO (here Mr. Mules) was not a responsible person with the ability to pay.  The CFO admitted he knew the company wasn’t complying with its employment tax obligations, and knew other creditors were being paid.  He alleged, however, that he lacked the ability (as CFO) to make the required payments…seems like an uphill battle.  He could win though, as the contention is that the owner/CEO/President (Mr. Hudak) made those decisions, had that authority, and misled the CFO to believe the payments were made.  Neither side will likely be able to put much past the Court in this matter, as Judge Marvin Garbis is presiding (he who authored various books on tax, including Cases and Materials on Tax Procedure and Tax Fraud and Federal Tax Litigation).


The Eleventh Circuit Requires IRS to Hold a Hearing Prior to Making a Trust Fund Recovery Penalty Assessment if Proposed Responsible Officer Makes Timely Request

Reversing the decision of the Tax Court in a Collection Due Process (CDP) hearing challenging the appropriateness of the assessment, the Eleventh Circuit in Romano-Murphy v. Commissioner determines that the changes to IRC 6672 in 1996 require the IRS to actually hold an appeals hearing before assessing the trust fund recovery penalty (TRFP) and not simply offer the hearing. The IRS position in the case, supported by the absence of a statutory requirement explicitly requiring a hearing before assessment, was that the statutory change required it to send the proposed responsible officer a certified letter notifying the person of the proposed TFRP assessment and offering a hearing with Appeals but did not require that Appeals actually hold a hearing prior to the making of the assessment.  This is a case of first impression in the Circuit courts even though the law has been in existence for two decades.  Unless the IRS acquiesces to the decision, look for it to contest the issue in other circuits.  Because the IRS failure to offer the hearing in this case was a mistake, it may be many more years before the issue comes up again.


In 1996 Congress added IRC 6672(b), which requires the IRS to notify the person it has identified as a responsible officer of the proposed assessment under that statute and offer the person a hearing with Appeals. Before the change in the statute, the IRS could simply assess the 6672 liability at any time before the expiration of the statute of limitations.  Some persons found out about the assessment upon receiving notice and demand.  The lack of a formal administrative method for appealing the decision of the revenue officer to assess this liability concerned many practitioners and led to the change.  The change has an impact on the statute of limitations because the IRS must wait for 60 days after sending the notice before it can assess.  The statute is suspended during that 60 day period assuming that the IRS properly sent the notice.

Ms. Romano-Murphy operated a healthcare staffing business from 2002-2005 and served as CEO of that business. For the second quarter of 2005 the business filed a Form 941 with a liability of over $600K and no remittance.  After unsuccessfully seeking payment from the company, the IRS turned its attention to her.  After its investigation, it sent her letter 1153 in July 2006 stating that it intended to make a 6672 assessment against her and informing her that she had the right to go to Appeals to protest the decision of the Collection Division.  The letter explained what she needed to do to request the Appeals conference.  On September 6, 2006, she responded to the letter requesting a conference.  Her protest letter raised two issues neither of which directly challenged the TFRP assessment.  First, she stated the IRS erred in determining the amount of the trust fund taxes owed and second, the IRS erred in calculating the penalty.

For unknown reasons, the IRS did not forward the protest to Appeals and, instead, assessed the TFRP against her on October 15, 2007, in the amount proposed in the letter. She wrote several letters to the IRS protesting the assessment prior to her opportunity to discuss the matter with Appeals; however, those letters went unanswered.

In September, 2008, she received a Collection Due Process (CDP) notice and timely requested a hearing. This time she received a hearing at Appeals and she contested the liability.  The Appeals employee noted that she had not received a hearing before the assessment even though she timely requested one.  He allowed her to challenge the correctness of the TFRP assessment in the CDP hearing.  After reviewing the case, the Appeals employee determined that the TFRP assessment was correct both in substance and in amount.  She received a notice of determination sustaining the proposed levy, and she timely petitioned the Tax Court.

The Tax Court sustained the determination of Appeals. In its decision the Tax Court noted that Appeals did give her a chance to contest the underlying liability in the CDP context even though it had failed to give her the requested hearing prior to making the assessment.  She filed a motion to vacate the order arguing that the failure to give her a hearing before assessment invalidated the assessment.  The Tax Court denied her motion finding that taxpayers have no right to a pre-assessment hearing.

In her appeal of this decision, she targeted the correctness of the assessment made without the opportunity for the Appeals conference. The IRS acknowledged that it must send the notice but argued that 6672 only requires it send the notice and not that it hold an Appeals conference.  The statute states that “[n]o penalty shall be imposed [the TFRP penalty] unless the Secretary notifies the taxpayer in writing … or in person that [the proposed responsible officer] shall be subject to an assessment of such penalty.”  Later, the statute makes it clear that the notice must precede the assessment but says nothing about the hearing.  In the alternative, the IRS argued that even if the hearing is a prerequisite to making the assessment, the failure here was harmless error because she received the same type of conference in the CDP context.  The 11th Circuit looked at the statute, the regulations, the IRM and other relevant authorities in deciding that the pre-assessment hearing must occur, if requested, prior to the assessment.  It remanded the case to the Tax Court, however, because it could not make a decision on the record before it whether the making of the assessment was harmless.

The 11th Circuit found that even though 6672(b) does not have a subsection that addresses the requirement of a pre-assessment hearing before the making of the assessment, subsection (b)(3) “does presuppose that there will be a pre-assessment determination at some point if a taxpayer files a timely protest.”  That subsection addresses the impact of the notice on the statute of limitations.  It provides that “if there is a timely protest of the proposed assessment” the statute of limitations on assessment “shall not expire before … the date 30 days after the Secretary makes a final administrative determination with respect to such protest.”  The Court notes that the IRS position renders the terms “protest” and “final determination,” terms not defined anywhere in the Internal Revenue Code, meaningless.  Because of the language in (b)(3) the 11th Circuit concludes that “there will be a pre-assessment determination of liability and notice thereof to the taxpayer if a timely protest has been filed….  Statutory silence on the details as to how these procedures are to occur does not require us to shrug our collective shoulders and let the IRS act in an arbitrary fashion.”

Having decided that the IRS must offer the requested Appeals conference before assessment based on the language of the statute, the Court then looks for further support of its conclusion. It finds support for its conclusion using a technique it used in the case of Griswold v. United States, 59 F.3d 1571 (11th Cir. 1995) where it sought to determine how to remove a federal tax lien.  In that case, after finding little guidance in the statute, it looked to the regulations and the IRM to determine how to release a lien and it felt looking at those sources in this case could also provide instruction.

The relevant regulation (See (d) Example 7) does not explicitly state that the pre-assessment hearing is a requirement; however, the example makes clear that the Appeals Office must make a determination prior to the assessment. The regulations under CDP also contemplate an Appeals hearing before assessment and deny a taxpayer a hearing on the merits in the CDP process if the taxpayer did not make the request for a hearing after receiving the 6672(b) notice. The third regulation to which the Court cited was the procedural regulation governing Appeals functions which describes the pre-assessment Appeals process in TFRP cases.

The Court next turned to the IRM for support of its decision. There it found a host of provisions describing the hearing in detail.  So, the Court felt comfortable with its interpretation of the statute that the pre-assessment hearing, when properly requested, must occur prior to the making of the assessment.  It pointed out that the Tax Court did not address the harmless error issue in its decision because it decided that the hearing was not a statutory prerequisite to assessment so it remanded the case for a determination on that point.

The IRS’s failure here will not occur often. It admitted that the failure to hold the hearing did not result from an intentional act but from an oversight.  It will almost always offer the Appeals conference when a taxpayer makes a timely request.  Nonetheless, the opinion provides an important procedural victory for Ms. Romano-Murphy and for all taxpayers.  With respect to TFRP cases, potentially responsible officers have another tool to use in attacking the assessment.  Even though it will rarely occur, for the person denied a hearing, the IRS lapse in holding the hearing provides a basis for knocking out the assessment.  This will generally occur after the statute of limitations has expired.  On a broader basis, the Court’s refusal to accept the IRS argument that the statute only requires notice and does not require the IRS to do the thing contemplated in the notice could have broader implications.  Other statutes have notice provisions that may not clearly spell out whether the IRS must hold an administrative hearing after giving notice.  The 11th Circuit’s decision provides substance to the procedural mechanism of notice and gives teeth to the intent of the statute.


Improving Payroll Tax Compliance

On December 8, 2015, the IRS announced a “New Early Interaction Initiative [that] Will Help Employers Stay Current with Their Payroll.”  I am not sure how the resource strapped IRS will accomplish the effort but it makes great sense to try.  Unpaid payroll taxes create the most frustrating part of the tax gap because employees actually pay their taxes yet the IRS never sees the money because the employers who collect it do not pay it over to the IRS.

From my perspective working on these cases within the IRS, the failure of employers to pay over the collected taxes usually resulted from poor cash management. While a small fraction of employers failed to pay with theft in mind, most employers simply had a bad business model or bad execution of their model.  Businesses with cash flow problems would ignore the IRS as long as possible because the IRS ignored them.  While other creditors lined up at the door to make sure they were paid, the IRS might take six to nine months to get around to pursuing the employer that failed to pay over the taxes they had collected for the IRS.  The delay by the IRS not only caused it not to receive payment but also caused problems for the responsible officers of the business who typically did not realize the long lasting consequences of not paying the taxes such as their personal liability for this debt and the inability to discharge the liability in bankruptcy.


The announcement does not say what caused the IRS to suddenly wake up to the fact that getting involved early with employers who were not depositing their payroll taxes could make a huge difference in the amount of taxes collected. The announcement says that the “initiative will seek to identify employers who appear to be falling behind on their tax payments even before an employment tax return is filed.”  Because two thirds of federal taxes are collected through the payroll system, maximizing recovery of the payments taxpayers make to their employer who acts as an agent for the IRS is critical to a successful collection system.

The states face the same problems the IRS has with agents who fail to pay over collected taxes. States not only face the problem with employment taxes but their use of sales taxes makes the collection by agents even a larger problem for them.  The IRS should look to the states for ideas on how to improve success in collecting from their agents.  The recent passage by Congress of the ability of the IRS to work with the State Department to revoke the passport of someone with substantial unpaid federal taxes, suggests that Congress is looking at the use by states of licenses as a way to “encourage” compliance in this area or to shut down business that fail to comply with their responsibility to collect and pay over taxes.  The federal government does not issue many licenses but could work with the states to create use of licenses as leverage for payment of federal taxes just as it cooperates with the states to offset state liabilities with federal refunds and vice versa.

Just in case the IRS is interested in more ways to improve this system now that it has announced it will take this first step, I offer and link to several more ideas, based on law review articles I have previously written on this subject, some of which require Congressional action and some do not:

  1. The trust fund recovery penalty (TFRP) serves as a collection device for collecting the payroll taxes when the business does not pay. It generally takes the IRS two or three years to assess the TFRP after the period giving rise to the liability has passed. The person charged with TFRP, however, does not pay interest from the due date of the return but only from the date of assessment because 6672 was placed in the chapter for assessable penalties in 1954. I suggest changing the system to charge interest from the due date of the return not only to pick up additional revenue but also to remove the incentive for the responsible person to fight against imposition of the penalty as long as possible to save on interest charges. If the penalty remains in the assessable penalty section of the Code, no statute of limitations on assessment should exist to have it align with other penalties in that section.
  2. The IRS should require business to identify the responsible officers when they obtain their EIN and on each successive payroll tax return so that it can immediately assess the TFRP against the self-identified individuals and pursue other responsible individuals within the statutory period.
  3. The IRS should provide incentives for small businesses that timely pay their employment taxes. Large business run by executives rather than owners do not need incentives to pay the employment taxes but small business might be encouraged by a small incentive. About half the states provide some incentive for prompt payment of sales taxes.
  4. The IRS should require bonds of individuals seeking to run businesses who have a history of non-payment of employment taxes. If the person has proven untrustworthy, why allow them to serve as an agent again with no safety net? About 80% of the states have some form of bonding requirement for businesses collecting sales taxes.
  5. The IRS should eliminate the withholding credit and the Social Security credit for the responsible officers who fail to pay over the withheld employment taxes. The present system allows the responsible officers to receive the credit on their individual accounts even though they made the decision not to have the agent pay the withheld taxes to the IRS. Why should the responsible person receive credit against their personal liability? Of course, the innocent employees should receive credit for the monies withheld from them by the agent of the IRS but allowing the credit to the person(s) who made the decision not to pay over the withholding does not make sense.
  6. The current IRS practice concerning collection of the TFRP provides an incentive not to pay in situations in which more than one responsible officer exists. The IRS keeps the money of the first responsible officer that pays and either stops its efforts to collect or refunds any excess collected to the later paying responsible officers. The IRS should create a system that incentivizes the responsible officer to pay first and not last. The current system creates a bad collection model by placing the incentive to pay in the wrong place.
  7. The trust fund portions of employment tax returns should be public documents and not documents protected by the disclosure laws. The collection of federal taxes for the IRS and the payment of those taxes over to the IRS should not be treated as private information subject to the disclosure laws but rather as public information to which we are all entitled. These businesses are acting as trustees for us all in this aspect of their business and it should not be cloaked with the privacy to which their returns are entitled with respect to their own tax liabilities.

As an author of law review articles I often had the feeling of a tree falling in the forest with no one around. I questioned whether the article really made any sound other than to advance my effort to obtain tenure or to secure a writing bonus.  Writing the blog gives me much greater gratification that someone is actually reading what I write even though having people read what I write inevitably leads to people pointing out what I have written is wrong or does not make sense.  I appreciate this opportunity to rehash old law review articles that I think still offer some ideas in the area of collected taxes that have not been explored at the federal level.  We all benefit from the efficiency of our current system where most taxes are collected from intermediaries.  We all also benefit when those intermediaries follow through on their obligations to pay over collected taxes.  The businesses that do not follow through on this gain an inappropriate competitive advantage over those that do comply in addition to harming all of us by reducing the amount that enters the federal coffers.

As a part of the announcement Commissioner Koskinen stated that “Employers play a key role in our tax system, and we want to offer them the information and assistance they need to carry out that responsibilities [sic]. With early interaction; we will be able to offer help weeks or even months sooner, when it can often do the most good.”  While getting the employers to pay over the collected taxes obviously benefits the IRS and makes the remarks somewhat self-serving, I agree with the Commissioner that the IRS can assist small businesses by getting on the scene early.  For too long the IRS has played the role of bad guy coming in at the end to shut down the business after the owners paid creditors of lower priority who would not have had the ability to pierce the corporate veil and hold the officers personally responsible.  By getting their early, the IRS can perhaps make small business owners aware of the importance of paying the collected taxes before it is too late to save the business and before it is too late to avoid a significant and non-dischargeable personal liability.  It will be interesting to see if the IRS can actually do this at a time of significant austerity at the agency.