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Recently, Internal Revenue Service Revenue Officers (i.e., collection representatives) were directed to assess the Trust Fund Recovery Penalty pursuant to Internal Revenue Code Section 6672 faster and get more aggressive in the collection of those taxes from delinquent taxpayers.

Internal Revenue Code Section 7501 requires employers to withhold and pay income and FICA taxes from an employee’s wages and hold them in trust for the government.  These are commonly known as “trust fund taxes.”  If the employer fails to do so, it is liable for the taxes.  With many businesses being conducted through limited liability entities, Congress determined that the IRS needed a tool to easily pierce through the corporate veil and make the assessment of the tax against the responsible persons of the limited liability entity.  Thus, Internal Revenue Code Section 6672 was borne. 

Internal Revenue Code Section 6672 essentially provides that the responsible person(s) who willfully fails to collect, account for, and pay over the trust fund taxes of an employee is personally liable for 100% of the trust fund taxes that were not collected, accounted for, and paid over to the government.  Accordingly, to be liable for this penalty there are two requirements: (1) being a responsible person; and (2) willfully failing to collect, account for, and pay over the taxes. 

A responsible person can be an officer, director, shareholder, partner, manager, bookkeeper, controller, or regular employee charged with the duty.  Job title is not the sole factor, but what the person’s role in the company was when the taxes were not paid over.

Willfulness is defined in the Internal Revenue Manual as “intentional, deliberate, voluntary, and knowing as distinguished from accidental.”  The degree of willfulness is very low.

Determinations of responsibility and willfulness requires a facts and circumstances analysis and it is the general practice of the IRS to error on the side of making the assessment against an individual and letting the Appeals Division and the courts to sort it out.  To determine responsibility and willfulness, a Revenue Officer will send out a letter to a potentially responsible individual and request an interview.  If the request is ignored, it will usually be followed up with a Summons.  During the interview, the Revenue Officer will ask the questions on a Form 4180, Report of Interview of Responsible Person for Trust Fund Recovery Penalty and fill out the form and ask the interviewee to review the answers and sign the form.  The answers on this form will make up an important part of the IRS’ file to sustain to assessment if appealed.  Some questions that the IRS will ask the responsible person include: (1) who determined financial policies for the company; (2) who had check signing authority; (3) who had authority to hire and fire employees; (4) who had the power to open bank accounts; (5) who were the officers, directors, and shareholders of the company; (6) who guaranteed bank loans; (7) who determined what bills were paid and not paid.

Essentially, the IRS believes anybody that signs a check is a responsible person notwithstanding an employee who may have been directed by his employer to pay certain bills and not pay other bills.  This becomes a very delicate issue for an employee working for a company facing financial difficulties.  If the employee knows the trust fund taxes are not being paid and signs checks to pay other creditors, including payroll checks, that employee is potentially liable for the trust fund recovery penalty.  If that employee refuses to sign the checks at the direction of his employer, he may face the possibility of being terminated.  So what is an employee to do when faced with this situation?

The obviously safest course of action for the employee is to resign their position or refuse to sign the checks and force the employer to accept the fact that the employee is not going to sign checks paying creditors before the IRS or terminate their job.  If the employee refuses to sign the checks, they should also go to the bank and remove themselves from the bank account and remove their check signing authority.  With a termination of employment by the employer firing the employee, at least the employee will be entitled to unemployment benefits. 

If an employee does not want to run the risk of losing their job then they are faced with building their defense in case they are determined to be a responsible person.  In such a situation, the employee will want to send an email or a memo to the employer setting forth the bills that need to be paid with the IRS being the first creditor to be paid.  These needs to be done each time the bills are paid.  The employee will then want to retain the response from the employer as to which bills are to be paid.  Documentation will be the most important asset the employee has when the assessment comes so have as much as possible in writing to and from the employer. 

The trust fund taxes are nondischargeable in bankruptcy and, absent paying them, the only other recourse to address the liability is an offer in compromise with the IRS, which can be a difficult and long process.  If you are employed in a company that is having financial difficulties and you have check signing authority, you need to be aware of this potential liability and what to do about it.  Although you may think you have done nothing wrong, the IRS may have a different opinion and when they come to interview you, they are not on your side, they are not your friend, and they are looking to make an assessment against you.  Be aware of your rights and seek proper representation and advice.

– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation.  Mr. Harrel may be reached at 209-952-4545 or


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