TRUST FUND RECOVERY PENALTY – Byrne v. Commissioner, No. 2:06-cv-12179 (3d Cir. 2017)
Why This Case is Important: One of the IRS’s most effective tools in collecting unpaid employment taxes is the trust fund recovery penalty (TFRP). The TFRP enables the IRS to hold certain individuals personally responsible for the unpaid “trust fund” portion of the taxes (the portion that should have been withheld from the employees’ wages). This case discusses the requirements to be held personally responsible.
Facts: This case involved the former CEO of a company called Eagle Trim. After learning that the company’s controller, who was responsible for ensuring that the company paid its federal employment taxes and filed related returns on time, failed to pay certain taxes on time in 1999 and 2000, the taxpayer hired a CFO and engaged an accountant to assist the controller with his responsibilities. In 2001, during a lender audit, the company’s lender determined that the controller was falsifying the company’s records to overstate its income, making it appear that the company was profitable when it actually was not. The company entered into a forbearance agreement with the Lender, which required that the company’s financial and other operations be managed by a third-party crisis management company (BBK). The following month, the lender informed the taxpayer that, as a result of the controller’s wrongdoing, the company had underpaid its employment taxes in 2000. The taxpayer requested BBK’s permission to pay the past-due taxes. BBK refused this request and fired the taxpayer. The company later filed bankruptcy. The IRS then assessed the TFRP against the taxpayer with respect to the company’s unpaid trust fund taxes of $850,000. When the IRS denied the taxpayer’s request to abate this assessment, he filed a petition with the U.S. Tax Court protesting this denial. The Court found in favor of the IRS, and the taxpayer appealed.
Law and Analysis: Trust fund taxes are those federal income and FICA taxes that employers are required to withhold from an employees’ wages and pay to the IRS. When a business fails to remit trust fund taxes to the IRS, the IRS can assess the unpaid taxes against the individuals who were responsible for ensuring that the taxes were paid and who willfully failed to pay the taxes. In this case, the parties agreed that the individuals were “responsible” for paying the taxes; the only dispute was whether they “willfully” failed to do so. Under Sixth Circuit case law, for an individual to have acted willfully with respect to unpaid trust fund taxes, he or she must have either: (1) had actual knowledge that the trust fund taxes were not paid, and have had the ability to pay the taxes, or (2) recklessly disregarded known risks that the trust fund taxes were not paid. An individual will not have acted willfully if he or she believed that the taxes were in fact being paid, so long as that belief was, in the circumstances, a reasonable one. In this case, the Court determined that prior to being fired (after which time he was no longer “responsible”), the taxpayer reasonably believed that the taxes in question had been paid. Therefore, he did not act “willfully” and could not be assessed the TFRP. The Court overturned the lower court’s decision and found in favor of the taxpayer.
IRS DEADLINES – Rubel v. Commissioner, No. 16-3526 (3d Cir. 2017)
Why this Case is Important: When taxpayers receive correspondence from the IRS that contains a deadline for responding, they presumably rely on that deadline as being accurate. As this case demonstrates, relying on these deadlines is not a good idea and taxpayers should always calculate deadlines with the assistance of a tax professional.
Facts: In Rubel, the taxpayer and her ex-husband filed joint income tax returns for 2005 through 2008. There was an unpaid tax liability for each return. In 2015, the taxpayer filed requests for the IRS to relieve her from her responsibility for these liabilities as an innocent spouse. In 2016, the IRS sent four letters denying her requests and stating that she had 90 days from the dates of those letters to file a petition with the U.S. Tax Court appealing those denials. These 90-day periods would have ended no later than April 12, 2016. In March 2016, the taxpayer sent additional information to the IRS in support of her original requests. The IRS responded with notices indicating that it was upholding its denials and that the IRS had until April 19, 2016 to file a Tax Court petition. In accordance with that letter, the taxpayer filed a petition on April 19, 2016, a week after the petition was actually due based on the dates of the original denial letters. The IRS filed a motion to dismiss the petition as untimely and the Tax Court granted the motion. The taxpayer appealed that ruling.
Law and Conclusion: Section 6015 of the Internal Revenue Code permits a taxpayer to file a Tax Court petitions with respect to an IRS denial of a request for innocent spouse relief no later than 90 days after the date of the denial notice. In this case, the taxpayer undoubtedly missed her deadline for filing a petition, presumably based on the IRS notice giving the wrong deadline. The issue was whether the 90-day deadline is “jurisdictional,” in which case the Tax Court would not have authority to hear the taxpayer’s case regardless of the reason for the late filing, or a “claims-processing deadline,” which is subject to extension based on IRS conduct and other equitable considerations. Based on the Court’s review of the statutory language and rules of statutory construction, it determined that the 90-day deadline was jurisdictional. That being the case, regardless of the fact that the IRS’s error led to the taxpayer’s late filing, the Tax Court did not have jurisdiction over the case and the Court upheld the Tax Court’s dismissal.
DIVORCE AND INNOCENT SPOUSE RELIEF – Asad and Akel v. Commissioner, T.C. Memo. 2017-80 (2017)
Why This Case is Important: Taxpayers may mistakenly believe that the IRS will respect a divorce judgment requiring one spouse, and not the other, to pay the couple’s joint federal income tax liability. While this may factor into the IRS’s review of an individual’s request for innocent spouse relief, as this case demonstrates, the IRS is not bound by such a judgment.
Facts: In this case, the taxpayers were formerly married to each other but divorced in 2013. In 2008 and 2009, each owned their own, separate rental properties. In 2013, the IRS sent a notice of deficiency to the taxpayers disallowing the rental property losses they claimed on their 2008 and 2009 joint returns, which losses related to both of their properties. In the taxpayers 2013 divorce agreement, they agreed that they would each be responsible for 50% of the total balance due to the IRS. Subsequent to the divorce, each taxpayer filed a request for innocent spouse relief requesting to be relieved of the portion of the liability allocable to the other spouse. The IRS initially denied these requests and the taxpayers both filed Tax Court petitions contesting the denials. Before trial, the IRS agreed to grant the requests in part, holding Asad responsible for roughly one-third of the liability and holding Akel responsible for the rest. The taxpayers did not accept this and requested that the liabilities be split evenly in accordance with the divorce agreement.
Law and Analysis: While the divorce agreement/judgment established the taxpayers’ rights against one another under state law, and would allow one of them to recover from the other any payment of the taxes in excess of 50%, it was not binding on the IRS. Without the IRS’s consent, parties who are jointly liable for taxes do not have the right to allocate the liabilities among themselves in a manner that the IRS must respect. That being the case, the Court denied the taxpayers’ requests to have the taxes split among them evenly and upheld the IRS’s proposed allocation.
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