Must the IRS Obtain Supervisory Approval Before Assessing You with Personal Responsibility for Employment Taxes (TFRP)?

Eli Noff, Esq., Partner

Mary F. Lundstedt, Esq., Associate

On January 21, 2020, in Chadwick v. Commissioner, the Tax Court determined that the initial determination of TFRP assessment requires written supervisory approval[1] Interestingly, the Tax Court had not previously resolved the question of whether Internal Revenue Code (IRC) §6751(b)(1) (preventing the IRS from assessing a penalty unless its initial determination has written supervisory approval) was applicable in the context of TFRPs.[2] And the Tax Court’s decision here clearly diverges from the IRS’s argument, which maintains that the requirement does not apply in the IRC §6672 TFRP context, because IRC §6672 acts to impose a tax rather than a penalty.[3]

Facts

Taxpayer was the sole member of two companies, C1 and C2. Both companies neglected to pay employment taxes for multiple calendar quarters.

The IRS assigned a different Revenue Officer (RO) to each company in order to investigate their tax delinquencies. Their investigations revealed that for: (1) C1, Taxpayer was the person responsible for hiring, establishing pay rates and signing payroll checks, and (2) for C2, Taxpayer’s signature appeared on the employment tax payments that had been received by the IRS in the past. As such, the investigations both determined that Taxpayer was the responsible person to collect the employment taxes and pay them to the IRS.

On March 8, 2016, the RO for C1 completed Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, wherein it recommended assertion of TFRPs against Taxpayer for the last two quarters of 2014. Form 4183 included RO’s supervisor’s signature—approving this recommendation.

Also, on March 8, 2016, the IRS mailed to taxpayer a Letter 1153, Trust Fund Recovery Penalty Letter. The letter informed Taxpayer that: (1) the IRS proposed to assess TFRPs for the last two quarters of 2014, and (2) Taxpayer had a right to appeal that determination. Since Taxpayer did not appeal, the IRS assessed the TFRPs on June 20, 2016.

Similarly, on April 8, 2016, the RO for C2 completed Form 4183, recommending TFRPs against Taxpayer for the first three quarters of 2015. Form 4183 was approved and signed by this RO’s supervisor, as well.

Likewise, on the same day the C2 Form 4183 was completed, the IRS mailed Letter 1153 which informed Taxpayer that: (1) the IRS proposed to assess TFRPs for the first three quarters of 2015, and (2) Taxpayer had a right to appeal that determination. Again, Taxpayer failed to appeal, so the IRS assessed the TFRPs on August 8, 2016.

By 2017, the penalties totaled over $100,000. They remained unpaid, so the IRS issued a Notice of Intent to Levy and Notice of Your Right to Hearing. Taxpayer timely responded to this notice with a request for a Collection Due Process Hearing (CDP). Included in the response was Taxpayer’s request that the IRS consider currently not collectible status among all other collection alternatives available.

The Settlement Officer (SO) assigned to the matter reviewed the records and informed Taxpayer that collection alternatives could only be considered if Taxpayer provided the following information prior to the hearing: (1) individual and business financial information in Forms 443-A ad 433-B; (2) executed Forms 1040 for tax years 2015-2017; (3) proof that estimated tax payments were made for tax year 2018; (4) proof that employment taxes for the current quarter were timely deposited; and (5) supporting financial information.

Taxpayer failed to submit returns and financial information before the hearing. Although, Taxpayer’s representative argued that Taxpayer was not liable for certain quarters pertaining to C2, because he had resigned from his position, the SO maintained that since Taxpayer had neglected to "take advantage of prior opportunities to dispute his underlying tax liabilities, he could not challenge them during the CDP hearing." [4]

Taxpayer’s representative still requested that the SO place Taxpayer in currently not collectible status. The SO gave 30 additional days for Taxpayer to supply the requested information—but Taxpayer did not submit anything. Thus, on July 25, 2018, the SO issued a notice of determination sustaining the levy.

Taxpayer timely petitioned Tax Court for review. Thereafter, the IRS filed a motion for summary judgment. The Tax Court directed Taxpayer to respond to the IRS motion by October 21, 2019 - Taxpayer failed to respond.

Applicable Law

Per IRC §6751(b)(1), the IRS may not assess a penalty unless the "initial determination" of such assessment is approved in writing by the assessor’s immediate supervisor[5]. Specifically, IRC §6751(b)(1) states:

No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.

Under IRC §6672, liability is imposed upon the individual(s) responsible for an employer’s failure to withhold and remit required taxes. This section authorizes that such responsible person: "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." [Emphasis added].

In Belair Woods, LLC v. Commissioner, the Tax Court held that the initial determination of a penalty assessment was embodied in a document by which the Examination Division formally notified the taxpayer that it had finished its work and had unequivocally decided to assert penalties."[6]

Analysis

  1. Applicability of IRC §6751 to TFRPs

    The Tax Court first noted that IRC §6672 is located in Subtitle F, Chapter 68, Subchapter B of the IRC. Significantly, Subchapter B is captioned "Assessable Penalties." Thus, the Tax Court emphasized that it has noted before that IRC §6751(b)(1) encompasses "many so-called assessable penalties" in that section of the IRC.[7]

    Additionally, the Tax Court noted that:

    Section 6751, in short, sets forth comprehensive procedural requirements for all of the penalties and other items included in subchapters A and B. It would be anomalous, in the absence of any textual justification, to exempt section 6672 penalties from the scope of those rules.

    Moreover, unconvinced by the decision in United States v. Rozbruch (i.e., that IRC §6751(b)(1) is inapplicable to TFRP’s, because IRC §6672 acts to impose a tax rather than a penalty),[8] the Tax Court noted that "[l]ike penalties for failure to file returns and failure to disclose information, TFRPs are imposed as a sanction for failing to do something."[9]

  2. Timeliness of Supervisory Approval

    The Tax Court referred back to its earlier decision in Belair Woods, LLC v. Commissioner,[10] and noted that each penalty in the instant case was embodied in Letters 1153 that were mailed to Taxpayer. And these Letters 1153, continued the Tax Court, were the first formal communication to Taxpayer of the definite decision to assert TFRPs.

    Noting that the Internal Revenue Manual (IRM) 5.7.4.6 and IRM 5.7.4.7 (Nov. 12, 2015) provides that supervisory approval of TFRPs always The Tax Court referred back to its earlier decision in Belair Woods, LLC v. Commissioner,[11] and noted that each penalty in the instant case was embodied in Letters 1153 that were mailed to Taxpayer. And these Letters 1153, continued the Tax Court, were the first formal communication to Taxpayer of the definite decision to assert TFRPs. precede the issuance of a Letter 1153, the Tax Court found that this was satisfied since the supervisors’ signatures were secured on each Form 4183 at the time the Letters 1153 were mailed.

Conclusion

In the end, the Tax Court departed from case law and IRS arguments, deciding that the initial determination of TFRP assessment requires written supervisory approval. However, the Tax Court found that supervisory approval was timely and proper in this case. As such, the Tax Court sustained the proposed collection activity in this case. Of course, the court reminded the taxpayer that he is free to submit a proposed collection alternative supported by the required documentation at any time.

Taxpayers facing TFRPs should consult a tax professional to help them determine whether assessments were properly approved and how best to resolve their tax matters.

If you have questions or concerns about trust fund recovery penalties or tax collection matters, contact Frost & Associates, LLC today at 410-497-5947.


[1]154 T.C. No. 5 (Jan. 21, 2020).

[2]Id. at 11, citing See Blackburn v. Commissioner, 150 T.C. 218, 219-220 (2018).

[3]See CC-2018-006, and United States v. Rozbruch, 28 F. Supp. 3d 256 (S.D.N.Y. 2014), aff'd on other grounds, 621 Fed. Appx. 77 (2d Cir. 2015).

[4] Chadwick v. Commissioner, at 7.

[5] Note that there is no requirement to provide the taxpayer with a copy of such approval. IRM 20.1.1.2.3(7) (11-21-17).

[6] 154 T.C. No. 1 (2020).

[7]Chadwick v. Commissioner, at 12, citing Graev v. Commissioner, 149 T.C. 485, 495 n.17 (2017).

[8] 28 F. Supp. 3d 256 (S.D.N.Y. 2014), aff'd on other grounds, 621 Fed. Appx. 77 (2d Cir. 2015).

[9] Id. at 15.

[10] 154 T.C. No. 1 (2020).

[11] 154 T.C. No. 1 (2020).

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