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.

Timely TFRP Appeal?

The Tax Court only has jurisdiction in Trust Fund Recovery Penalty (TFRP) cases through Collection Due Process.  So, the TFRP jurisprudence in the Tax Court is rather slim.  Thanks to a tip from Bob Kamman, I learned of a case in which on January 14, 2022, Judge Gustafson issued an interesting 4-page order.  The case is a CDP case, Lipsky v. Commissioner, involving a TFRP assessment.  The issue is whether the taxpayer protested the penalty within the 60 days stated in the Letter 1153.  The importance of the timing concerns the possibility that by not protesting in time petitioner gave up his prior opportunity to contest the assessment and cannot in his current Tax Court case raise the merits of imposition of the TFRP.  The letter may or may not have been dated August 8, 2019 but was mailed on that date to the taxpayer.  Subsequently, an undated version of the letter was faxed to the taxpayer’s representative on August 13, 2019.  That second date was 59 days from when the appeal was received.  If August 8, 2019, is the operative date, the protest was sent to the IRS late, though maybe the taxpayer has an excuse that has not yet been brought forth.

As the order points out, “the 60-day deadline stated in Letter 1153 is not an unbending jurisdictional deadline nor even a non-jurisdictional statutory deadline as to which a taxpayer might have to justify equitable tolling. It is instead an administratively imposed deadline. That does not mean we can simply ignore it; but rather we should apparently review for abuse of discretion.”


The order highlights the importance not only of deadlines but of the origin of the deadline.  A deadline for something due to the IRS is different than a deadline to a court.  A deadline created by the IRS is different than a deadline created by statute.  As the order mentions, the different types of deadlines don’t mean that deadlines are unimportant but the type of deadline can implicate the rules that will govern decisions when the IRS complains that a taxpayer missed the deadline.  In the CDP context, I grapple with this issue a bit in an article about what it means to timely submit a CDP request.  This post also discusses the issue and contains a link to the article.

As discussed further below, this case, at least at the summary judgment phase where it sits today, principally involves proof that the IRS even started the deadline or when it started the deadline.  It does not involve the excuses for missing a deadline, but those excuses become more important in general as courts begin to recognize the situations in which taxpayer’s excuses can make a difference and situations, what Judge Gustafson describes as unbending jurisdictional deadlines, where even the best excuse won’t get you in the door.  The Lipsky case does not involve an unbending deadline though even cases involving an unbending deadline must have a clear start to the time period when the deadline begins and that where the problems in Lipsky start.

Before getting further into the case, I mention as an aside that Judge Gustafson, more than any other judge on the Tax Court, seems to pay careful attention to IRS summary judgment submissions.  You can find several prior posts in which we have discussed the lessons Judge Gustafson provides to Chief Counsel attorneys about what they need to provide when submitting a summary judgement motion.  In advance of filing the supplemental motion, the Chief Counsel attorney in the Lipsky case might want to leaf through those prior post which can be found here, here, here and here.

Rule number one might be provide an affidavit of something you are trying to prove from someone with actual knowledge of the facts.  Here the affidavit from the Chief Counsel attorney fails at the outset.  I don’t want to be too harsh here because Chief Counsel attorneys have lots of cases in their inventories and tracking down the right person or persons while everyone works in a remote environment could prove difficult, but in seeking summary judgment rather than proving something through testimony and giving the petitioner the opportunity to cross examine, giving the Court an affidavit from someone without first hand knowledge of the facts puts the Court in a tough spot.

To get out the facts in the case and to get to the meat of the problem, reading the concerns expressed by Judge Gustafson provide the best approach:  

As we read the Commissioner’s motion, he seems to assume that the operative date that starts the 60-day period within which to file a protest is the date that Letter 1153 was mailed. However, the deadline actually stated (twice) in the Letter 1153 itself is “60 days from the date of this letter”, which we think probably should be best understood to mean the date that appears on the letter.

The declarant certifying the exhibits is the Commissioner’s counsel in this case, not the Revenue Officer (Andrea I. Faust) whose name appears on the Letter 1153 and who was apparently responsible to prepare it and have it mailed (nor even the settlement officer at Appeals who wrote in his case notes that the letter was “dated 08-08- 2019”). That is, the Commissioner does not authenticate the handwritten date by anyone who could claim personal knowledge of the letter’s preparation.

Thus, at this point the summary judgment record includes two copies of the letter, one of which was sent to the taxpayer’s representative with a blank date field and a stated transmission date of “August 13, 2019”, and the other of which has a handwritten date (“8/8/2019”) that may or may not have appeared on the original. If we make all possible inferences in Mr. Lipsky’s favor, we would have to assume that the letter as mailed to him was undated and that the protest was timely as having been submitted within the 60-day period after the fax date on the copy sent to his representative.

Dates on IRS letters and dates the IRS actually mails letters do not always coincide and some might say do not often coincide.  Most letters do have dates on them but here the IRS sends the representative an undated letter raising questions about the handwritten date on the alleged original letter.  The judge emphasizes that Letter 1153 says the 60 day period starts on the date appearing on the letter.  Because so many IRS documents do not get sent on the date on the letter, an easy starting point for raising an excuse about timeliness might be simply keeping the envelope showing a postmark on a date a week or two after the date on the letter.  This could be important because, Judge Gustafson goes on to say:

Moreover, the 60-day deadline stated in Letter 1153 is not an unbending jurisdictional deadline nor even a non-jurisdictional statutory deadline as to which a taxpayer might have to justify equitable tolling. It is instead an administratively imposed deadline. That does not mean we can simply ignore it; but rather we should apparently review for abuse of discretion, see Barnhill v. Commissioner, 155 T.C. 1, 21 (2020), Appeals’s application of that deadline on the facts of a given case. We would have to decide, among other things, whether it was an abuse of discretion for Appeals to impose a deadline after sending the representative a supposed copy of Letter 1153 that was in fact not a true copy because it lacked the critical date.

Add the Lipsky order to your arsenal of cases for arguing that your client has not actually missed the deadline.  The IRS likes to knock out cases because taxpayers have missed a deadline and avoid allowing a court to review the underlying merits of a case.  The issue in this CDP case is the prior opportunity issue I have complained about previously on several occasions and one about which the National Taxpayer Advocate made a legislative recommendation in her most recent annual report.  The IRS may need to start paying a lot more attention to the way it starts the deadline as these time periods get more and more scrutiny.

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.