Can Pay Agreement Relieve Responsible Person of Penalties?

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By K.W. Mitchell

“I paid off my personal taxes and the company is current with what it owes,” said Peter, the company's chairman. “I shouldn't still be subject to collection.”

“There are no regulations that state that being current on a business's installment agreement warrants suspension of collection of a responsible person,” said Fran, a collections representative for the Internal Revenue Service.

FACTS: A communications company failed to pay income and employment taxes, missing seven quarterly deadlines over a four-year period.

The chairman of the company and his wife filed a personal federal income tax return one year, but they did not pay their personal tax liability from the previous year. The husband entered into an installment agreement with the IRS to pay the couple's personal tax liability.

The following year, the IRS sent the company a letter granting approval of its request to pay outstanding corporate tax liabilities through an installment agreement.

The IRS, after determining that the chairman was a responsible person for the company, assessed trust-fund recovery penalties against the chairman. Because of the corporate assessments, the agency ended his installment agreement for personal tax liability.

The IRS then sent the chairman a notice of its intent to levy to collect the taxes owed by the business.

The chairman requested an installment agreement for the employment taxes and reinstatement of his installment agreement for personal liability.

The chairman later said that he wanted an installment agreement for his personal liabilities but wanted the trust-fund recovery penalties suspended because the company was paying them off through its own installment agreement.

A settlement officer explained to the chairman that under the terms of his installment agreement for personal income taxes, owed federal taxes must be paid on time for the agreement to continue. The letter cited the assessment of trust-fund recovery penalties for failure to pay the withheld taxes for the company, and that the installment agreement for personal taxes defaulted because of the failure to pay trust-fund recovery penalties.

A corporate official believed trust-fund recovery penalties should be suspended because of a previous agreement with the IRS.

The chairman paid off his personal income tax liability to suspend collection of the company's trust-fund recovery penalties, relying on Internal Revenue Manual provisions, which he interpreted as stating that collection of such penalties was invalid after he was current on his personal liabilities and the company was current with its installment agreement.

The settlement officer said, however, that the chairman's paying his personal tax liability and the company's payments of its liability under an installment agreement did not lead to the suspension of collection of trust-fund recovery penalties.

ISSUE: Does paying personal tax liabilities relieve a company's responsible person of trust-fund recovery penalties?

DECISION: Determining that the chairman's interpretation of the Internal Revenue Manual provisions were not supported, he remained subject to trust-fund recovery penalty collection, the U.S. Tax Court ruled.

A more liberal reading would not suggest that collection of the penalties should be suspended on “previously assessed trust-fund recovery penalties of a responsible person,” the court said.

The provisions referenced by the chairman are merely “procedural guidance for initiating a business taxpayer, trust fund-related agreement,” and “addresses a general rule of nonassessment of trust-fund recovery penalties when commencing such an installment agreement,” the court said. “It does not address suspension of collection after assessment with respect to an already established installment agreement” (Kirkpatrick v. Commissioner, T.C., No. 6525-13L, T.C. Memo. 2014-234, 11/17/14).

POINTERS: Federal taxes that employers are required to withhold from employees' pay are known as trust-fund taxes because the employer holds these monies in trust for the federal government.

Employers are legally required to collect, withhold, account for and deposit or pay to the government these taxes. A willful failure to collect, account for or remit trust-fund taxes is subject to a penalty equal to the amount of tax that was not collected or paid.

The trust-fund recovery penalty is assessed against those whose have obligations to collect and remit trust-fund taxes, provided the failure is willful.

If a corporation or other business entity willfully fails to collect or pay these taxes, the trust-fund recovery penalty can be assessed not only against the business itself but also against responsible officers and employees personally.

The IRS often makes multiple assessments, but it can collect the full amount of the penalty only once. The penalty is separate and distinct from the employer's liability for the underlying tax.

For more information, see PAG's “Federal Employment Tax Penalties” chapter.

This analysis illustrates how courts resolve pay-related disputes. The names and dialogue are fictitious.