10. DIRECTION OF PAYMENTS

§ 5:52 In General

One method of reducing the potential trust fund liability is to assure that the employer designates each payment made on account by placing a restrictive endorsement on the back of each check worded as follows:

“Direct to Trust Fund Portion of taxes only for the period ended for Corporation.” [IRM 5.7.7 & IRM 8.11.2]

§ 5:53 Designated Payments

The Internal Revenue Manual directs that the Service will follow the taxpayer’s direction of payments and states as follows:

“A designated payment is a voluntary one that the taxpayer has directed to be applied in a particular manner; i.e., a specific period, kind of tax, tax portion, interest, etc. Normally such direction will be followed by the Service.” [IRM 5.1.2.3]

§ 5:54 Contemporaneous Direction

The courts have consistently held that a designation made contemporaneously with a payment must be applied by the Internal Revenue Service in accordance with such direction. Therefore, if you make a designation on the back of the check, the entire amount must be applied toward the trust fund portion. The direction must be written, and the IRS need not honor an oral direction. Read More

7. IRS INVESTIGATION OF WILLFULNESS

§ 5:43 In General

Revenue Officers take a very ‘simplistic approach to willfulness. Generally, if the bank statements indicate that liabilities other than taxes were paid during the time of accrual, then all responsible persons are deemed willful. Such an approach ignores the requirement of knowledge of nonpayment inherent in the willfulness standard. There is seldom a corporation which did hot pay at least some other debt. The practitioner must, therefore, seek to establish that his client was unaware of the tax liabilities.

§ 5:44 Preparation Of Return

The IRS uses signatures on tax returns to rebut lack of knowledge. Signatures, however, are not always indicative of willfulness. If the duty to pay taxes is vested in someone other than the person who signs returns, the signature may merely have been a ministerial act without knowledge of the failure to pay the taxes. One of the author’s clients actually prepared the tax returns and the federal tax deposits for a corporation as part of his duties as corporate vice-president. The vice-president only later became aware that for several months the president held the federal tax deposits in his desk drawer. Soon after learning of the president’s action, the vice-president left the company. The vice-president prevailed on the issue of willfulness at an appellate hearing-because even though he prepared and signed the tax returns, he lacked the requisite knowledge to establish willfulness. Read More

6. WILFULNESS

§ 5:29 In General

The Internal Revenue Service must prove and establish a second element for liability under the Trust Fund Recover Penalty. That element is “willfulness.” A responsible person need not have failed to pay the taxes with a fraudulent or evil purpose. [IRM 5.7.3.3.2] That person must merely be shown to have knowingly and intentionally disregarded the duty to pay trust fund taxes to the IRS. “Willfulness” can be defined as follows:

An act is willful if it is voluntary, conscious, and intentional. [A responsible person acted willfully if he] knowingly used available funds to prefer other creditors over the Internal Revenue Service.

§ 5:30 Liability Requiring Personal Fault

The Trust Fund Recovery Penalty cannot be Asserted without a showing of personal fault. This is a penalty and the penalty is invoked only upon willful failure to pay a tax.

§ 5:31 Personal Fault

Some courts have redefined the definition of “willfulness” by stating:

Personal fault being a necessary element of willfulness, relevant evidence bearing on the element of personal fault may not be ignored. Read More

5. IRS INVESTIGATION OF RESPONSIBILITY

§ 5:22 In General

On February 2, 1993, the Internal Revenue Service amended its manual [IRM P-5-60] to provide as follows:

Responsibility is a matter of status, duty, and authority. Those performing ministerial acts without exercising independent judgment will not be deemed responsible.

In general, non-owner employees of the business entity, who act solely under the dominion and, control of others, and who are not, in a position to make independent decisions on behalf of the business entity, will not be asserted the trust fund recovery penalty. The penalty shall not be imposed on unpaid, volunteer members of any board of trustees or directors of an organization referred to in § 501 of the Internal Revenue Code to the extent such members are solely serving in an honorary capacity, do not participate in the day-to-day or financial operations of the organization, and/or do not have knowledge of the failure on which such penalty is imposed.

§ 5:23 Reasons For Changed Policy

Over the years, the IRS has unfairly asserted the Trust Fund Recovery Penalty against many individuals. The IRS adopted new policies on February 2, 1993, in an attempt to avoid some of the prior abuses of the penalty. The author has found that it is now easier to avoid assertion of the penalty against titular officers. In one case the IRS dropped its efforts to assert the penalty against the unpaid treasurer of a charity. Read More

3. RESPONSIBILITY AND WILLFULNESS

§ 5:5 In general

When a corporation fails to pay taxes, the IRS may proceed against the persons responsible for the nonpayment. IRC § 6672 provides statutory authority for imposing a Trust Fund Recovery Penalty on “any person ‘required to collect, truthfully account for, and pay over collected taxes” Who willfully fails to collect such tax or willfully attempts in any manner to evade or defeat such tax or payment thereof. The Supreme Court has held that a responsible person did not have to be responsible for all three duties listed in the statue because such an interpretation would allow easy avoidance of the penalty by changing officers’ duties prior to the expiration of any quarter.

Generally, two conditions must be met in order to assess and collect the Trust Fund Recovery Penalty tax:

(1) The taxpayer must be a responsible person, and

(2) The taxpayer’s conduct must be willful

IRC § 6671 defines a “person” as anyone with a duty to perform. IRC § 6671(b) defines the term “person” to include “an officer or employee of the corporation or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.” Read More