Responsible Person and Lender Liability for Trust Fund Taxes—§§6672 and 3505, written by John W. Schmehl, Esq., and Richard L. Fox, Esq., both of Dilworth, Paxson LLP, discusses in detail the liability of responsible persons under §6672 and of lenders and others who provide funds under §3505 where there is a failure of an employer to remit trust fund taxes to the government. 

This Portfolio covers specific topics such as 

• Section 6672: the type of taxes to which it applies, how it relates to independent contractors, and its function as an IRS device 
• willfulness required, including discussions regarding the meaning of willfully, the financial difficulties of a corporation, and the state of inadequate funds to pay gross wages 
• the collection or satisfaction of and contribution for penalty, including joint and several liability, disclosure of IRS collection efforts against others, and the right of contribution or indemnity from others 
• the procedural aspects of §3505, including voluntary payment of, assessment, and enforcement of liability, as well as the necessity of a civil proceeding 

Responsible Person and Lender Liability for Trust Fund Taxes—§§6672 and 3505 allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more. 

Detailed Analysis

I. Section 6672

A. In General

B. Type of Taxes to Which § 6672 Applies

C. Section 6672 and Independent Contractors

D. Function as IRS Collection Device

1. Collection in Lieu of Taxes

2. No Requirement to Collect from Employer First

E. Definition of Responsible Person

1. In General

2. Definition of Person

3. Identifying Responsible Person

a. In General

b. Specific Factors

(1) Contents of Corporate Bylaws

(2) Stock Ownership

(3) Holder of Corporate Office

(4) Corporate Director

(5) Authority to Sign Checks

(6) Day-to-Day Management

(7) Hiring and Firing Employees

(8) Authority to Sign and File Tax Returns

4. Unexercised Authority

5. Disjunctive Reading of Statute - Scope of § 6672 Not Limited Only to Those Persons Performing All Three Statutory Duties

6. Multiple Responsible Persons

7. Volunteers of Charitable Organizations

8. Sole Proprietors

9. Partners

10. Bookkeepers

11. Employee Leasing Arrangements

12. Liability of Those Outside Formal Structure of Business

13. Effect of Family Relationships

14. Knowledge of Trust Fund Tax Liability

15. Mere Technical Authority or Titular Designation

F. Willfulness Required

1. In General

2. Definition of Willfully

3. Financial Difficulties of Corporation

4. Inadequate Funds to Pay Gross Wages

5. Failure to Pay Over Pursuant to Superior's Order

6. Lack of Knowledge of Unpaid Taxes

a. Responsible Persons During Accrual of Delinquency

b. Responsible Persons After the Delinquency

c. Definition of Unencumbered Funds

7. Coercion by Creditors

8. Reckless Disregard of Obvious or Known Risks That Taxes Are Not Being Paid

9. Investigate-or-Correct Mismanagement Rule

10. Negligence, Confusion or Mistaken Belief Leading to Unpaid Trust Fund Taxes

11. Comparison to Criminal Standard

12. Reasonable Cause

13. Coordination of § § 3509 and 6672 as They Relate to Willfulness

G. Sale of Company

1. Seller of Business

2. Purchaser of Business

H. Amount of Liability

1. Limited to Withheld or Collected Portion

2. Time Liability Attaches

3. Interest and Penalties

4. Knowledge of Deficiency Subsequent to Failure to Pay Taxes; After-Acquired Funds

5. Responsible Person Status Attained Subsequent to Failure to Pay Taxes

I. Summary of Commonly Raised Defenses

1. Lack of Sufficient Authority

2. Resignation

3. Lack of Knowledge

4. Delegation of Authority

a. Responsible Person Status

b. Willfulness

5. Directions From Others

6. Final Word

7. Defending the Subordinate Employee

8. Reasonable Cause

9. Equitable Defense Where Government's Conduct Prevents Collection of Trust Fund Taxes

10. Statute of Limitations

11. Previous Negotiations with IRS

12. Alcoholism, Drug Addiction and Physical Illness

13. Section 3509 Relief for Employer Negates Willfulness Under § 6672

J. Collection or Satisfaction of and Contribution for Penalty

1. Joint and Several Liability

2. Disclosure of IRS Collection Efforts Against Others

3. Right of Contribution or Indemnity from Others

a. From Other Responsible Persons

(1) Federal Law

(2) State Law

b. From the Employer

4. No Requirement to Collect From Employer First

5. Satisfaction by Employer as Satisfaction Against Responsible Person

6. Satisfaction by One Responsible Person as Satisfaction Against Another Responsible Person

7. Satisfaction by Responsible Person as Satisfaction Against Employer

K. Allocation of Payments to Trust Fund Taxes

1. Generally

2. Voluntary Payments

3. Oral Agreements to Designate Payments to Trust Fund Taxes

4. Designation May Be Implied

5. Involuntary or Undesignated Payments

6. Standard to Determine Voluntary Payments

7. Tax Payments Made in Bankruptcy

8. IRS's Ability to Reallocate Undesignated or Involuntary Payments

L. Bankruptcy Aspects

1. Corporate Bankruptcy

a. Effect on Liability of Responsible Person

b. Allocation of Payments to Trust Fund Tax Liability

(1) Chapter 11 Reorganization and Liquidation

(2) Chapter 7 Liquidation

c. Trust Fund Tax Payments Made Within 90-Day Pre-Petition Period

2. Responsible Person's Bankruptcy

M. Statute of Limitations

1. Assessment

2. Notice Requirement Prior to Assessment

3. Collection

4. Effect of Bankruptcy

5. Criminal Statute of Limitations

N. Deductibility of Payments Under § 6672

1. Business Deduction Under § 162

2. Bad Debt Deduction for Payment of Penalty

3. Loan of Trust Fund Taxes to the Employer

4. Contribution of Trust Fund Taxes to Capital

5. Deductibility of Accrued Interest on the Trust Fund Recovery Penalty

O. Procedure

1. Investigation by Revenue Officer

2. Appeal Rights

3. Assessment

a. In General

b. Presumption of Correctness

c. Jeopardy and Quick Assessments

d. Accrual of Interest

e. Procedure in Repeat Offender Cases

4. Claim for Refund

a. In General

b. Statute of Limitations

c. Divisible Tax

d. Stay on Collection Activity

(1) Rules for Tax Attributable to Taxable Periods Ending On or Before December 31, 1998

(2) Rules for Tax Attributable to Taxable Periods Beginning After December 31, 1998

5. Multiple Responsible Persons

a. Contesting the Assessment

b. Collection Issues

c. Refund Suits

d. Rights to Obtain Information About and Recover From Other Persons

6. Standards of Appellate Review

a. Issue of Responsibility

b. Issue of Willfulness

II. Section 3505 - Liability of Third Parties Paying or Providing for Wages

A. Background

B. Definition of “Other Person” in § 3505

1. In General

2. Agents and Conduits

3. Contractors

4. Shareholders

C. Direct Payment of Wages by Third Parties - § 3505(a)

1. Amount and Nature of Liability

a. Tax and Interest

b. Penalties

2. What Constitutes Direct Payment of Wages?

a. Timing of Payment Unimportant

b. Control of Funds May Establish Direct Payment

D. Supplying Funds for Wages - § 3505(b)

1. Supplying Funds

a. Honoring Overdrafts

b. Same Day Availability of Deposited Funds

c. Shareholder/Guarantor

d. Providing Funds as Agent of Other Suppliers

e. Control Over Funds Equivalent to Supplying Funds

2. Supplying Funds for the Specific Purpose of Paying Wages

a. Definition of Ordinary Working Capital Loan

b. Actual Notice/Knowledge that Funds Will Be Used To Pay Net Wages

c. Supplier Need Not Know Exact Amount Used

d. Tracing the Portion of Funds Provided for Wages

e. Providing Sufficient Funds for Gross Wages Does Not Always Negate Purpose of Providing Funds for Net Wages

f. Control of Employer's Funds May Establish Purpose of Loan

g. Summary

3. Notice or Knowledge of Nonpayment

4. Limiting Lender Liability Under § 3505

5. The 25% Limitation on § 3505(b) Liability

a. Calculation of the 25%

b. Does the 25% Include Interest?

E. Liability of a Debtor of the Employer Under § 3505

F. Procedural Aspects of § 3505

1. Voluntary Payment of Liability

2. Assessment and Enforcement of Liability

a. Necessity of a Civil Proceeding

b. Notice of Assessment Not Required

c. When Statute of Limitations Begins to Run on a Civil Proceeding

III. Comparison of Remedies Under Sections 6672 and 3505

A. Overview

B. Sections 6672 and 3505(a)

C. Sections 6672 and 3505(b)

D. Deductibility of Payments

E. Credits Between Sections

IV. Relationship Between Section 6672 and Section 6663 Fraud Penalty

V. Personal Liability for Unpaid Diesel, Gasoline, and Fuel Excise Taxes

VI. Criminal Sanctions for Failure to Pay Withholding Taxes

Working Papers

Table of Worksheets

Worksheet 1 Sample IRS Letter Accompanying Form 2751

Worksheet 2 Procedures Providing Certain Conditions Under Which Third Parties Financing Employers' Payrolls Are Liable for the Taxes Required to Be Withheld from Employees' Wages. [Rev. Proc. 78–13, 1978–1 C.B. 591]

Worksheet 3 Procedures for Appeals of Trust Fund Recovery Penalty Assessments Under Section 6672 [Rev. Proc. 2005-34, 2005-24 I.R.B. 1233]

Worksheet 4 IRS Policy Statement P–5–60: Trust Fund Recovery Penalty

Worksheet 5 Internal Revenue Manual Excerpts - Trust Fund Compliance [IRM 5.7]

Worksheet 6 Chart: Comparison of Employment Tax Liability of Employer, Responsible Persons, and Parties Subject to Section 3505(a) and Section 3505(b).

Worksheet 7 Sample Complaint for Refund of Section 6672 Taxes (U.S. District Court).

Bibliography

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Statutes:

Treasury Regulations:

Committee Reports:

Treasury Rulings:

Cases:

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