“Extreme Personal Hardship” Doesn’t Excuse Trust Fund Recovery Penalties
Trust Fund Recovery Penalties (or TFRPs) refer to the tax penalties assessed against the responsible person(s) of a business (e.g., directors, officers, etc.) that failed to collect, account for, or pay over taxes on behalf of its employees. As a result, the failure of a business to pay over employment taxes does not necessarily stop with the business. Directors and officers may be personally liable for their actions (or inactions) with respect to the business’ employment taxes. In a recent decision by the Fifth Circuit Court of Appeals, the Court affirmed the lower court’s determination that the president and owner of certain businesses was personally responsible for trust fund recovery penalties. Further, while the taxpayer experienced “extreme personal hardship,” as well as business difficulties, those circumstances did not excuse his underlying tax responsibilities.
Generally, individuals may be subject to personal liability for certain penalties—trust fund recovery penalties—if a business failed to pay certain taxes (such as employment taxes) as a result of his or her actions.
(a) General Rule
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.
Section 6672(a) outlines two distinct but related elements the IRS must satisfy before imposing personal liability for the trust fund recovery penalty. First, an individual must have been a responsible person—i.e., one who was required (and therefore had a duty) to collect, truthfully account for, and pay over the taxes at issue. Second, the responsible individual must have acted willfully. He or she must have willfully failed to collect the tax or truthfully account for and pay over the tax, or willfully attempted to evade the tax.
According to Section 6671(b), a “person” for purposes of Section 6672(a) is defined as follows:
(b) Person Defined
The term “person”, as used in this subchapter, includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.
However, whether someone is a “responsible person” is truly a matter of status, duty, and authority, not necessarily knowledge. The essential question is whether the person had sufficient control over corporate affairs to avoid nonpayment of employment taxes. And such an inquiry is not determined by the mechanical application of any particular list of factors. Moreover, “willfulness” cannot be established unless the IRS can show that the “responsible person” made a voluntary, conscious, and intentional decision to apply business/corporate funds to other obligations or for other purposes. The government must establish both elements in order to impose trust fund recovery penalties on an individual.
United States v. Williams
On July 6, 2021, the Fifth Circuit Court of Appeals issued its decision, affirming the district court’s determination that Mr. Williams willfully failed to pay certain business taxes and was, therefore, subject to trust fund recovery penalties under Section 6672(a). Mr. Williams became a licensed dentist in 1967. For the tax periods at issue (2012-2014), he was the owner and president of two dental practices and also owned a business management company that managed the affairs of the dental practices.
In 2012, Mr. Williams encountered problems with cash flow and reduced his salary, refinanced his home, and brough his two dental practices into Chapter 11 bankruptcy proceedings. Additionally, he filed employment tax returns that reflected payroll taxes were owed but not paid. Moreover, Mr. Williams faced “extreme personal hardship,” as Mr. Williams underwent heart and back surgery; lost his son, sister, and brother-in-law; sought treatment for an opioid use disorder; experienced serious medical issues; cared for his ailing wife; and supported his late son’s family. Nevertheless, Mr. Williams continued to operate his businesses.
The United States filed suit against Mr. Williams, among others, in order to collect the unpaid taxes. The government moved for summary judgment. Mr. Williams did not dispute that the businesses owed the federal taxes or that he was a “responsible person.” However, he did dispute that he willfully violated the federal tax laws. The Northern District of Texas granted the government’s motion for summary judgment, and Mr. Williams appealed. In its decision to affirm, the Fifth Circuit Court of Appeals held, in part:
The district court correctly concluded that Williams acted willfully as a matter of law because the United States put forth uncontroverted evidence that Williams directed payments to other creditors despite knowing that he owed unpaid payroll taxes. The government established that Williams knew of his outstanding payroll tax obligations through Williams’s deposition statements that he recalled having payroll tax issues in 2012, 2013, and 2014 and IRS forms bearing his signature that reported a balance due on withheld payroll taxes. The record also shows that, although Williams was aware that he owed payroll taxes, he drew a salary, paid employees and vendors, and directed the payment of rent and other bills instead of his IRS debt. By “paying private creditors in preference to the government” while he “actually knew the taxes were unpaid,” Williams acted willfully as a matter of law.
Williams nonetheless argues that he did not act willfully for two reasons. First, he contends that he was incapable of acting willfully because he was “not in his right mind” during the years in question. Williams points to the declarations of his two doctors, who both opined that Williams did not act willfully in failing to pay payroll taxes under § 6672. . . .
None of this testimony creates a genuine issue of material fact as to willfulness under § 6672. Williams does not refute the government’s evidence that he was aware of his outstanding payroll tax obligations or that his payments to other creditors instead of the IRS were “voluntary, conscious, and intentional act[s].” The excluded declarations indicate that Williams experienced personal and professional hardships around the time he failed to pay his taxes. Yet at the same time Williams supposedly lacked the mental capacity to act willfully, he saw dental patients, initiated bankruptcy proceedings, and sold a company. . . .
Second, Williams claims that he is not to blame for the failure to pay taxes because he had turned over his businesses’ tax duties to Beauchamp and Parma. But the fact that he “delegated the jobs of withholding and paying employees’ taxes and generally paying creditors is beside [the] point.” Barnett, 988 F.2d at 1455. Williams remained responsible for the collection and payment of payroll taxes under § 6672—a finding he did not contest in front of the district court. In the face of the government’s evidence that Williams knew of the unpaid payroll taxes yet decided to pay private creditors instead of the IRS, he cannot overcome summary judgment on the question of willfulness.
The Williams decision highlights several issues with respect to trust fund recovery penalties. First, while the IRS must satisfy both the “reasonable person” element and the “willfulness” element, the “fight” is generally related to whether the taxpayer acted willfully. Indeed, in this case, Mr. Williams conceded that he was a reasonable person as the president and owner of the dental practices; the dispute was focused on whether his actions were willful. Second, paying other creditors—any other creditors—besides the IRS when taxes are known to be outstanding generally demonstrates willfulness. Third, a doctor’s note does not necessarily excuse a taxpayer’s willful actions. Here, the totality of the circumstances (that Mr. Williams continued to meet with patients, initiated bankruptcy proceedings, and sold a business) undermined his argument that he was unable to run his practices (and, therefore, unable to meet his tax obligations). Finally, assignment of tax or payment obligations to another individual—such as a bookkeeper or an accountant—does not compromise a taxpayer’s personal responsibility.
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 I.R.C. § 6672(a).
 Id.; see Slodov v. United States, 436 U.S. 238, 246, n. 7 (1978).
 I.R.C. § 6672(a).
 I.R.C. § 6671(b).
 See Shaffran v. Comm’r, 113 T.C.M. (CCH) 1153 (T.C. 2017).
 See generally Bloom v. United States, 272 F.2d 215 (9th Cir. 1959).
 United States v. Williams, No. 20-10433, 2021 WL 2819016, at *1 (5th Cir. July 6, 2021).
 Id. at *3-4.