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.

§ 5:45 Signature On Payment Plan

The signature of a person on a payment plan with the IRS renders a willfulness defense almost impossible. Clearly if someone signs agreeing to pay a liability, there is little question of knowledge of that liability. The practitioner is usually left to defend only on the issue of responsibility.

§ 5:46 Responsibility Proving Willfulness

Revenue Officers are prone to reason that if an officer is a responsible person, then he or she should have known of the nonpayment. Courts have, however, required that the officer “recklessly disregard” his or her duty to know. Again, note the variance in perception of investigating officers and that of the courts. Such matters of subtle nuance might only be properly considered after an appeal or lawsuit. The practitioner’s duty is to aggressively advocate the client’s defenses to willfulness.