It’s great to be the chief executive of a business that is doing well. You are likely being paid well, in some combination of salary, bonus and distributions, you enjoy the many other perks that are attendant to the position, and, of course, there is the prestige that goes along with the job.

 Unfortunately, a business may sometimes struggle, and the chief executive may inadvertently disregard certain tax-related obligations in the process of trying to bolster the business. Oftentimes, the chief executive will fail to remit to the taxing authorities the income and employment taxes that the business had properly collected in respect of wages paid to its employees. The Tax Court recently considered such a situation.


Taxpayer served as the chairman of the board of directors for Corp. For the six quarters beginning in 2006 and ending in 2009, Corp. failed to pay income and employment taxes related to Forms 941, Employer’s Quarterly Federal Tax Return.

 On the personal side, Taxpayer ran into a similar issue when he filed a personal Federal income tax return for 2010, but failed to pay the tax owed. In late 2011, Taxpayer entered into an installment agreement with the IRS to pay off his 2010 personal income tax liability.

 Early in 2012, the IRS informed Corp. that its request to pay its Form 941 tax liabilities through an installment agreement had been approved.

 At the same time, the IRS determined that Taxpayer was a “responsible person” of Corp. for purposes of the Form 941 tax liabilities The IRS thus assessed trust fund recovery penalties against Taxpayer in March 2012. Because of these additional assessments, the IRS also terminated Taxpayer’s installment agreement for his 2010 personal income tax liability. The IRS sent to Taxpayer a Notice of Intent to Levy, informing him that he owed trust fund recovery penalties and advising him that the IRS intended to levy to collect these taxes.

 In response, Taxpayer submitted a Request for a Collection Due Process or Equivalent Hearing (a “section 6330 hearing request”). In the section 6330 hearing request, Taxpayer indicated, among other things, that he wanted an installment agreement and that he disagreed with the proposed levy action because he believed that the installment agreement as to his 2010 taxes had been “terminated for no reason” as he was “not in default on the installment agreement.” Taxpayer further argued that the collection of the trust fund recovery penalties should be suspended because Corp. was paying off its liabilities through its own installment agreement.

Settlement Conference

The settlement officer scheduled a conference for December 2012 at which Taxpayer would be offered the opportunity to explain why he disagreed with the collection action and to discuss possible collection alternatives. The letter from the IRS stated:

“On your request for a [section 6330] hearing, you indicated your installment agreement terminated for no reason. Our records indicated your installment agreement was established [in December 2011] and only included your outstanding tax liability for your Form 1040 for calendar year 2010. One of the terms of an installment agreement is that while the installment agreement is in effect, you will pay any federal taxes you owe on time. On [March 2012], you were assessed civil penalties for failing to pay the withheld taxes for [Corp] * * *. When the civil penalties were not paid, you did not meet terms of your installment agreement and your installment agreement defaulted.”

In January 2013, a conference took place between the IRS settlement officer and Taxpayer’s representative. The representative indicated that Taxpayer was not challenging the underlying tax liabilities and agreed to the civil penalties assessment. Taxpayer’s representative also indicated that Taxpayer wanted to pay in full the balance of his 2010 income tax liability in order to suspend collection of the trust fund recovery penalties.

The settlement officer explained that even if the 2010 income tax liability was resolved, collection of the trust fund recovery penalties against Taxpayer would not be suspended simply because Corp. was paying off those liabilities pursuant to its own installment agreement.

Taxpayer remitted the funds to fully pay his 2010 personal income tax liability.

Upon review of the Taxpayer’s financial documentation, the settlement officer determined that Taxpayer had the ability to the outstanding trust fund liabilities through a collection alternative, but Taxpayer would not agree to do so. In February 2013, the Appeals Office sustained the proposed levy action.

Section 6330

Section 6330 generally provides that the Commissioner cannot proceed with levy on a taxpayer’s property until the taxpayer has been given notice of and the opportunity for a section 6330 hearing and, if dissatisfied, an opportunity for judicial review of the administrative determination. At a section 6330 hearing, a taxpayer may raise any relevant issue relating to the collection action, including challenges to the appropriateness of the collection actions and possible collection alternatives. Sec. 6330(c)(2)(A). A taxpayer may contest the validity of the underlying tax liability, but only if the taxpayer did not otherwise have a prior opportunity to dispute the tax liability. Sec. 6330(c)(2)(B).

Taxpayer’s Position

In this case, the underlying liabilities were assessed under section 6672, which imposes penalties for failure to collect, account for, and pay over income and employment taxes of employees—“trust fund recovery” penalties. Taxpayer did not dispute these underlying tax liabilities, nor did he argue that he was wrongfully denied a collection alternative or that his prior installment agreement was wrongfully terminated. Instead, Taxpayer’s position was that he was originally covered under the installment agreement entered into by Corp. for the trust fund recovery penalties, and, now that he was in compliance with his 2010 income tax obligation, he should be “re-covered” under Corp.’s installment agreement. Taxpayer did not, however, produce the Corp. installment agreement or any documentary corroboration of this position.

 Instead, Taxpayer attempted to support his position by arguing that the settlement officer failed to consider relevant parts of the Internal Revenue Manual (“IRM”). He asserted that the IRM “clearly” states that the collection of trust fund recovery penalties “from responsible persons should be suspended so long as the primary business entity has an Installment Agreement and is current.”

 The Court stated that even a liberal reading of these provisions did not suggest that collection should be “suspended” on previously assessed trust fund recovery penalties of a responsible person. The Court pointed out that these sections provide procedural guidance for initiating a “business taxpayer, trust fund-related installment agreement.” They address a general rule of nonassessment of trust fund recovery penalties when commencing such an installment agreement. They do not address suspension of collection after assessment with respect to an already established installment agreement.

 Section 6330 provides due process protections for taxpayers in tax collection matters. The IRM provisions relied upon pertain only to assessment of trust fund recovery penalties. However, as Taxpayer did not challenge his underlying tax liabilities, there was no reason for the settlement officer to consider the IRM with regard to assessment.

 Moreover, the settlement officer acknowledged and considered Taxpayer’s argument. The applicable test is not whether or not other resolutions could have been reached by the settlement officer or by the Court, but whether the settlement officer’s determination was arbitrary, capricious, or without sound basis in fact or law. In view of the record, the Court stated that it could not conclude that the latter was the case.

 Thus, the Court found that Taxpayer remained subject to trust fund recovery collection even where he was in compliance with his personal obligations and Corp. was current with its installment agreement.


The foregoing evidences just how difficult it is for a so-called responsible person to avoid the economic consequences of the trust fund recovery penalty. It also illustrates one of the surprises that may follow an IRS determination of a taxpayer’s status as a responsible person. While certain defenses may be available to the taxpayer, these are fact-specific and cannot be relied upon from a planning perspective.

 Of course, the best way for a “responsible person” to avoid the trust fund penalty is by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required.  Where that is difficult to accomplish, economically-speaking, the business should at least remit the trust fund portion of the employment taxes (i.e., the employee’s share), and it should specifically designate that payment as being made in respect of such trust fund portion.

 Inevitably, there will be situations where the penalty will likely be unavoidable. In such a case, it will behoove a responsible person, who is aware that the company-employer is not satisfying its trust fund obligations, to voice his or her objections to such failure, and to take immediate and extensive steps to rectify the problem, including, if necessary, by ceasing business operations.

 Much of the foregoing may be avoided if those who would be responsible persons were educated, from the beginning of their involvement in the business, as to what their duties entailed with respect to employment taxes, and the real risk of personal liability in the event those taxes go unpaid.