Trust Fund Recovery Penalty—Assessment Statute

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IRC 6501

The United States District Court in Dawn D. Lagerkvist v. USA, 2024 WL 869548, N.D. Indiana, signed February 29, 2024, ruled in favor of the Government on its Motion for Summary Judgment and against the taxpayer’s argument that the statute of limitations for assessment of the Trust Fund Recovery Penalty (TFRP) had expired. In this case, upon application for a tax id number, the taxpayer advised the IRS that it was qualified to file a Form 944, rather than a Form 941 for its beginning tax year of 2012.  In reality, the taxpayer attempted to file a 1st Quarter Form 941 in early 2012 that was rejected in a return letter by the IRS. The taxpayer was advised it must change its filing to 941’s by proper request, or file a timely Form 944 annually. The taxpayer did neither, but in this case argues that the statute of limitations for collection of the TFRP has expired.  The law in Section 6501 states that the IRS is required to assess a tax within 3 years after the return was filed. If the taxpayer fails to file a return, the IRS may assess the tax (TFRP in this instance) at any time.  In other words, no return, no statute on assessment. The taxpayer argued that there was a dispute as to whether or not she actually filed the returns because she provided employee testimony that all filings were handled the same way. She argued the attempted filing of the First Quarter 941, along with other documents, such as her filed 1120-S, W-2s and W-2, should be sufficient to meet her annual return filing requirements and therefore the TFRP assessment was untimely. For multiple reasons, and through several pages of analysis, the Court rejected this premise as not only undermining the statute, but also imposing an unworkable administrative burden on the IRS. 

Levy on Right to Property in Trust 

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IRC 6331

The United States District Court for the District of Massachusetts ruled in Marshall F. Newman, trustee of the Angelo C. Todesca, Jr. Family Trust II v. United States of America v. Albert M. Todesca, filed August 9, 2023 as Civil Action No. 20-10632-FDS, that pursuant to IRC 6331, a Trustee’s failure to subdivide property in accordance with trust terms does not impair the IRS’s ability to levy taxpayer’s right to distribution. In 2009, Albert Todesca pleaded guilty to tax evasion for failing to remit taxes withheld from employee wages to the IRS.  He was then assessed the trust fund recovery penalty, along with assessments for personal income tax liabilities. The IRS then placed two levies on family trust assets for which he was a beneficiary held at Santander Bank, N.A. The trustee of the trust, Marshall F. Newman, then sued the bank and the U.S. government arguing the levies were illegal.  The trust at issue was established by the taxpayer’s father, who was now deceased. Taxpayer and his brother were beneficiaries. The trustee was to divide the trust into two separate trusts at the death of taxpayer’s father.  However, he never did so. Both trusts were to provide net income, or principal distributions, at the beneficiary’s request or at the trustee’s discretion. The trust held cash and real property, primarily. The IRS ultimately issued levies to the bank for the approximate total of $379,000.00  The bank froze the funds in the accounts and turned them over to the Court. Pursuant to IRC section 6331, after notice and demand, the IRS may collect tax by “levy upon all property and rights to property,” of the taxpayer who owes the government taxes. The Court took up the issue of whether or not the lien attached to an interest of the taxpayer, in the Trust. The Court explained that the language of the statute is broad and that Congress meant to reach every interest in property that a taxpayer might have.  In this case, the Court applied Massachusetts law to determine what interest the taxpayer has in the trust, and ultimately what interest the federal tax lien attaches to. This was a fact specific analysis that looked at the following factors: transferability, pecuniary value, control and enjoyment. While this may not be the rule in all jurisdictions, it is extremely difficult for a trust to protect assets from the reach of the federal tax lien, while the beneficiary retains some level of control. The Court even comments on spendthrift provisions…generally used to protect beneficiaries from creditors. Fundamentally, the Court explained that a beneficiary’s interest is not immunized from the federal tax lien by using this common tool. Ultimately, the Court allowed the government to succeed on its relevant actions in this matter. 

Trust Fund Recovery Penalty

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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. 

Appeal Rights and Trust Fund Recovery Penalty

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Letter 1153

The United States Tax Court in Mohammad A. Kazmi v. Comm’r of Internal Revenue, T.C. Memo 2022-13 filed March 1, 2022, ruled in favor of the IRS that a properly served and received Letter 1153 constitutes a prior opportunity to challenge the underlying liability and therefore a failure to appeal it prohibits the same challenge at a Collection Due Process hearing (CDP hearing). The taxpayer was issued a Letter 1153, Proposed Trust Fund Recovery Penalty, after interview by a Revenue Officer in his capacity as part-time hourly bookkeeper for his employer who had failed to pay over employment taxes.  A taxpayer has 60 days to challenge a Letter 1153 by submitting a written appeal.  Taxpayer did not make any effort to appeal and as such the IRS assessed him with the penalty.  After issuance of a Notice of Federal Tax Lien, taxpayer filed a timely CDP request and attempted to argue that he should not be held liable for the trust fund recovery penalty.  The settlement officer determined the taxpayer was prohibited from challenging the underlying liability in the CDP hearing.  Taxpayer argued that a Letter 1153 does not constitute a prior opportunity to address the liability because there is no ability to seek judicial review before the Tax Court if appeals would deny the requested relief. The Court agreed that it is correct there is no opportunity to seek Tax Court relief in this instance, but under the law, the taxpayer could get judicial review by paying the tax and seeking review in the Federal District Court.  As such, this does constitute a prior opportunity to seek judicial review.  Lesson  – always seek Appeal review after issuance of Letter 1153 if there are arguments to be made for relief from assessment.

Trust Fund Recovery Penalty 

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IRC Section 6672

The United States Court of Appeals for the Fifth Circuit ruled in United States of America v. Charles I. Williams, DDS, as Executor of Mary C. Williams, at Case No. 20-10433 filed July 6, 2021 that Charles I. Williams, acted “willfully” within the meaning of the statute and that the district court’s ruling indicating the same was affirmed. As such, Mr. Williams was held personally liable for the trust fund recovery penalties under section 6672(a) of the Internal Revenue Code. Mr. Williams owned and operated several dentistry practices. After not paying employment taxes, the government pursued collections. The central issue in the case was whether Williams acted willfully to allow for personal liability under the statute. Personal liability against responsible persons can attach under the statute when the person is a responsible person who willfully fails to turn over the withheld taxes. Willfulness requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent. The Court explained that evidence showed that the responsible person had knowledge of payments to other creditors after he was aware of the failure to pay withholding tax is sufficient to show willfulness. Mr. Williams had argued that he was in a mental fog and could not have willfully spurned his tax obligations. Further he argued that he had turned over his businesses’ tax duties to his bookkeeper and another individual. The Court ruled that he was in fact willful because he knew of the unpaid payroll taxes and yet decided to pay private creditors instead of the IRS. 

Trust Fund Recover Penalty

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I.R.C. section 6672

This is a hard fought case on a narrow issue that ultimately went in favor of the IRS. The Tax Court in Scott T. Blackburn v. Comm’r, 150 T.C. No. 9, filed April 9, 2018, was asked to review the verification of compliance rule of I.R.C. section 6751(b), as required by sections 6330(c)(1) and (3)(A). The Appeals officer must “obtain verification from the Secretary that the requirements of any applicable law or administrative procedure have been met.” Sec. 6330(c)(1). The Petitioner did not argue or contest the liability issue relating to assessment of the Trust Fund Recovery Penalty against him. The Revenue Officer in this instance has recommended assessment and said assessment was approved by the Revenue Officer’s manager using Form 4183. The name of the manager was listed on the form, but no signature was present. The taxpayer argued that in creating section 6751(b), Congress could not have meant to require a meaningless, supervisory “rubber stamped” signature. Petitioner asked the IRS many times to provide some evidence that the supervisor’s review was meaningful. Petitioner relies on the Internal Revenue Manual to suggest an argument that the signature of a supervisor in support of a penalty is not in itself a sufficient showing to comply with section 6751(b). The Court indicated that caselaw review applying these code sections has only required the officer to review the administrative steps taken before assessment of the underlying liability. To impose the requirement of a substantive review on the officer would allow the taxpayer to avoid the limitations of pursuing the underlying liability in a review under section 6330 and apply a level of detail in the verification process that has never been previously required, the Court explained.