payroll taxes | Caraker Law Firm, P.C.

IRC 7345

The U.S. Tax Court in Shaban v. Comm’r filed March 3, 2026 at T.C. Memo 2026-24 provides a good overview of what it means to be certified as a seriously delinquent taxpayer for passport purposes, and exceptions for that certification. The taxpayer in this matter was nothing but a victim to his own brother’s embezzlement, which approximated $9 million. Unfortunately, this included trust fund money for payroll taxes. Since the taxpayer was the owner of the business, he was assessed with the Trust Fund Recovery Penalty, or TFRP. The taxpayer took advantage of the opportunity to protest the proposed TFRP penalty, but his representative failed to timely respond to requests for information and the assessment stuck. Ultimately, he was certified by the Department of Treasury to the Department of State as seriously delinquent and his passport was affected. The taxpayer’s goal was to attack the certification through the argument that he was a victim of ID Theft. The Court reflected on their limited jurisdiction as defined by the relevant statute – IRC 7345. That statute only allows the Court to determine if the certification was erroneous, or if the IRS failed to reverse the certification when required to do so. It is noteworthy to explore the exceptions to the definition of “seriously delinquent tax debt,” according to the statute. Those exceptions are debt that is under the statutory amount ($66,000 for 2026), debt paid pursuant to an installment agreement, or an Offer in Compromise. In addition, a taxpayer can be placed in Currently Not Collectible status. Or, a debt where collection is suspended because of a request for collection due process hearing, or request for innocent spouse relief. It is also feasible for an administrative claim of ID theft approved by the IRS, to remove the liability from qualifying as a seriously delinquent tax debt. One would think given the taxpayer’s arguments that he was the victim of ID theft that he would have pursued the filing of Form 14039 Identity Theft Affidavit, for processing at the IRS. He did not, and because of that, along with the inability to substantiate any other exception under the statute, the certification was deemed proper. The take-away here is that establishment of a collection alternative, and other actions, can result in decertification for passport purposes, even if the debt is not paid in full.

IRC 6672

The United States Court of Appeals for the Fifth Circuit held that the taxpayer was a responsible person who willfully failed to pay over employment taxes on behalf of her employer in Pamela Cashaw v. Comm’r of Internal Revenue, filed May 31, 2023, and as such was liable for the Trust Fund Recovery Penalty (TFRP). The TFRP is equal to 100% of the unpaid income taxes, Social Security and Medicare withheld from employee’s paychecks, but not paid over to the government. In this case, the employer was Riverside General Hospital. The person held liable was initially hired as a pharmacist, but ultimately took over as hospital administrator after the chief administrative officer of the hospital was indicted for Medicare fraud. Cashaw, the taxpayer in this matter, was directed to take over as administrator temporarily by a federal judge. She was given nonexclusive signatory authority and oversaw the functionality of the hospital. That included payroll and operations. During her time, the hospital had serious financial distress as Medicare and Medicaid funding had been withdrawn due to the prior administrator’s alleged fraud. During this time, the hospital failed to pay its payroll taxes. The law at issue, set out in IRC Section 6672, states in summary that a penalty equal to the unpaid portion of the trust fund taxes may be assessed against “any person,” required to collect, account for, or pay over the withheld taxes who “willfully” fails to do so. The Court ultimately ruled that Capshaw “falls within the sweeping net of Section 6672 responsibility.” The record showed she was presented with checks to sign, reviewed them to see what they were for and even declined to sign one when she disagreed with the purpose of the check. While the Court indicated that she may not be the most responsible for payment of the taxes, she need only be “a” responsible person under the statute. For the “willful” component, the Court explained that the statute requires only a “voluntary, conscious, and intentional act, not a bad motive or intent.” The taxpayer’s testimony at trial established that she was aware the hospital was not paying its taxes and she made a choice to prioritize essential patient services above paying payroll taxes. The Court ruled that once she was aware the hospital was paying other creditors before the IRS, then she reached the standard of willfulness under the statute. This is a tough conclusion, but given the very broad nature of this statute, the correct conclusion.