Trust-Fund Liability at the Federal Level: The Willfulness Requirement

     As tax attorneys in Columbus, Ohio, Nardone Limited routinely advises taxpayers about their potential personal liability relating to liabilities owed by a business as part of our tax controversy work. When an IRS revenue officer contacts you or your business, it is important that you understand your rights and obligations. The IRS has broad authority and tools available to collect delinquent taxes, including conducting a trust-fund investigation of responsible persons. Most companies operate as a business entity that shields owners from personal liability for the company’s obligations. But, a major exception exists to this rule, commonly referred to as trust-fund liability. If an employer fails to pay certain taxes on behalf of their employees, the IRS and the Ohio Department of Taxation have the right to collect monies due from a responsible party’s personal assets. This article focuses on trust-fund liabilities at the federal level and is the last in a series discussing trust-fund liability at the state and federal levels. See our prior articles relating to responsible persons’ potential liability in Ohio, including: (i) Personal Liability for Business’s Failure to Pay Ohio Sales Tax; (ii) Business Owners are Not Always Responsible Parties under Ohio Law relating to Sales Tax Liabilities; and (iii) Trust-Fund Liability at the Federal Level: Who Does the IRS Consider to be a Responsible Person?

What is the purpose of trust-fund liability?

     The Internal Revenue Manual discusses the liability of third parties for unpaid employment taxes, also known as trust-fund liability. The purpose of trust-fund liability is to encourage employers to pay withheld employment and income taxes by making any responsible person personally liable for 100% of any unpaid trust-fund taxes. To do so, the Internal Revenue Code (“IRC”) authorizes the IRS to collect the monies due from a person who may otherwise be shielded from liability. These otherwise-protected people only become liable, however, if they were both willful and responsible in the nonpayment of the trust-fund liability taxes as described in IRC §6672. This article focuses on the willfulness requirement.

What does it mean to be willful?

     Under IRC §6672(a), any failure to collect or pay trust-fund taxes must be willful. Willfulness does not require a bad motive or specific intent to defraud the government. Rather, willfulness is present if a responsible party had knowledge of the tax delinquency and willfully failed to rectify it when funds were available. Ross v. United States, 949 F.Supp. 536 (N.D. Ohio 1996)(holding that the president of a company was a responsible person for willfully failing to pay withholding taxes). But, both courts and the IRS have expanded the definition of what it means to be willful. The IRS stated in Revenue Ruling 54-158 that willfulness exists even if the money was used to pay operating expenses or for other legitimate business purposes, including intentionally paying other creditors before the federal government. Bell v. United States, 355 F.3d 387 (6th Cir.2004)(holding that an individual is a responsible person when they are aware of the delinquent tax liabilities and choose to pay creditors prior to paying the government). Additionally, courts have expanded the definition of willfulness to include any intentional, deliberate, voluntary, reckless, or knowing failure to pay the monies due. See Domanus v. United States, 961 F.2d 1323 (7th Cir. 1992)(finding a business’s chief accountant was personally liable for trust-fund taxes because he voluntarily paid other creditors before paying the government).

How much will the IRS attempt to recover?

     Generally, the IRS only attempts to recover the unpaid balance of the trust-fund tax. The amount is typically based on the unpaid income taxes that were required to be withheld by the employer, plus the employee’s unpaid portion of FICA taxes. While the IRC’s sections on trust-fund liability do not expressly provide for any additional penalties or fees, the IRS is permitted to pursue additional fines and penalties under other sections of the code. See IRC §6672. Thus, if you are concerned about your potential liability or have been contacted by an IRS revenue officer, it is highly recommended that you consult with a professional to discuss further.

Contact Nardone Limited

     Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters, including appeals. If you or your business have been contacted by an IRS revenue officer or the Ohio Department of Taxation, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine your potential personal liability, as well as what options and alternatives are available to you.