In Kirkpatrick v. Commission the Tax Court addressed the case of an individual responsible officer. His corporation, Accurate, failed to pay over employment taxes for several quarters. It had a liability of almost a half million dollars. Despite the size of the liability, the business negotiated an installment agreement (IA) with the IRS and, by negative implication in the description of the facts of the case, remained current on the IA throughout the period of the Tax Court case. Mr. Kirkpatrick had a small liability for individual income taxes for 2010 and had also negotiated an IA on which, by negative implication, he also seemed current. After the establishment of both IAs, the IRS assessed the trust fund recovery penalty (TFRP) against Mr. Kirkpatrick. That assessment caused the IRS to declare his IA in default. That led to the issuance of a notice of intent to levy which, in turn, led to a collection due process hearing in Appeals followed by a Tax Court petition when the determination letter upheld the proposed levy action.
The case presents the common situation of how to handle a responsible officer penalty liability while the corporation attempts to pay off the trust fund (and non-trust fund) employment tax debt. A similar case, involving bankruptcy rather than IAs, made it to the Supreme Court almost a quarter century ago. The underlying situations remain the same, although the IRS has changed its procedures regarding the assessment of the TFRP in the interim. The Tax Court discusses the assessment aspect and offers the greatest potential for relief although not to Mr. Kirkpatrick on the facts presented by this case.
Mr. Kirkpatrick wants two things from the IAs. He wants his original IA back because the assessment of the TFRP did not result from bad tax behavior after the creation of his IA but merely the assessment of a liability from long ago actions. I thought he had a good point but the settlement officer and, ultimately, the Court did not. Second, he wanted the IRS to hold off collecting against him as long as Accurate remained in compliance with its IA. This argument comes up repeatedly in responsible officer cases. I think this argument also makes good sense; however, I understand how the IRS would not want to hold off collecting just because a corporation with a significant history of delinquency says it will make it all good.
On the second issue, the Supreme Court addressed a similar issue in the context of a Chapter 11 plan in the 1990 case of Energy Resources. In that case the corporation sought plan language designating that the Chapter 11 payments would first apply to the trust fund portion of the outstanding employment tax liability. The IRS objected arguing that the payment did not meet the criteria of voluntary payment necessary to allow a taxpayer to designate. The Supreme Court, following the lead of the First Circuit, recast the argument as one focused on the power of the bankruptcy court and held that the bankruptcy court had the power to allow designation and approved the plan language. This issue led to adoption of a position by the IRS that if the taxpayer did not seek to designate the payments in the bankruptcy plan the IRS would hold off on collecting from the individual responsible officer(s) as long as the corporation remained current on its plan obligations as well as its ongoing tax obligations. See IRM 5.17.10.9.5.2 (Aug. 1, 2010) (addressing designation of payments in Chapter 11 plans); IRM 1.2.14.1.3.8 (June, 9, 2003) (discussing application of payments in determining TFRP assessments and stating, “Absent statute considerations, assertion recommendations normally will be withheld in cases of approved and adhered to business installment agreements and bankruptcy payment plans. To the extent necessary, information will be gathered to support a possible assessment in the event the agreement is defaulted.”).
Mr. Kirkpatrick sought the same type of deal in an IA and, in the end, did not get it. I cannot say why the IRS will not give the same deal when the corporation pays through an IA rather than a Chapter 11 plan. Here the IRS successfully argued that it did not need to forebear under the law or under the IRM. Mr. Kirkpatrick may not have cited to the bankruptcy provisions of the IRM or the IRS, and the Court, may not have felt they were applicable. Apparently, no similar provisions exist for IAs. Perhaps they do not because the IRS has more control over the IA situation, although as discussed previously, not total control.
What Mr. Kirkpatrick did argue goes to the best strategy in these situations or at least one strategy that might have succeeded in his case. He cited to IRM provisions that allow the IRS collection employee to forebear on assessment of the TFRP if the corporation is paying back the underlying taxes. These provisions provide the path to keeping the IRS from collecting while the corporation pays but did not help Mr. Kirkpatrick because the IRS had already assessed the TFRP in his case. To qualify for the postponement of assessment, the responsible officer must extend the statute of limitations on collection and the corporation must remain current. Had he used these IRM provisions prior to the assessment, he not only could have avoided having the IRS seek to collect the TFRP from him but the IRS would not have terminated his IA for individual income taxes as it did.
Given that the IRS seems willing to forego making the assessment but not forego collection once it has assessed, the winning strategy in these cases seems clear. Of course, not every corporation will have the resources to pay back the taxes it failed to pay originally. In my experience, only a small number or corporations may have these resources. Still, if you have such a corporation, follow the IRM provisions to hold off assessment. If that does not work, keep in mind that bankruptcy might provide an alternate path to the desired result.