A recent case decided by the Sixth Circuit Court of Appeals overturns the findings of the lower court which held that Roger Byrne and Eric Kus of the Eagle Trim company were the responsible parties in “willfully” not paying payroll taxes. This case is significant owing to the rarity with which these cases are successfully defended.
“ALICE M. BATCHELDER, Circuit Judge. The Internal Revenue Code, 26 U.S.C.6672, permits the United States to recover unpaid trust-fund taxes from persons responsible for paying those taxes, if they willfully failed to pay them.”
“On remand, the district court conducted a bench trial and determined that Byrne and Kus willfully failed to pay Eagle Trim’s trust-fund taxes by recklessly disregarding the risk that the taxes were not being paid.”
“We vacate the district court’s judgment.”
This complex case hinges on the subject of willfulness of the owners Byrne and Kus versus that of their proxy, Bernard Fuller, who was both an investor and their accountant. Apparently Mr. Fuller was so incompetent that over time an Assistant Controller was hired and a CFO as well to supervise his work.
In addition, his work was being audited by their accounting firm, Weber, Curtin & Drake (WCD) who repeatedly provided a clear bill of health to the other owners. It was only when their main lender, GMAC, did a their own financial review that problems became apparent. Interestingly, these reports, created by two outside firms were not shared with the owners of Eagle Trim.
The Standard of Review for payroll tax cases has to be the factual details of the case:
“…willfulness is a question of ultimate fact because finding that someone was willful requires the application of a legal standard to underlying facts.”
While the Legal Standard is what will be applied to those facts:
“The Internal Revenue Code requires employers to withhold income and FICA (Social Security and Medicare) taxes from their employees’ wages and to deposit the withheld amounts with the United States Treasury on either a monthly or semiweekly basis, depending on the amount of tax due.”
“Employers are required to hold these monies in a special fund in trust for the United States, until such time as the employer is required to remit payment to the Treasury. 26 U.S.C. § 7501(a). “The withholding taxes are part of the wages of the employee, held by the employer in trust for the government; the employer, as a function of administrative convenience, extracts money from a worker’s paycheck and briefly holds that money before forwarding it to the IRS.””
“‘[A]n individual is liable under § 6672(a) if he or she: 1) is responsible for paying the taxes and 2) willfully fails to turn over the tax money to the government.'”
“The taxpayer bears the burden of proving by a preponderance of the evidence either that he is not a responsible person or that his failure to pay taxes was not willful.”
The owners Byrne and Kus were not found to be liable because while their Controller was inept and behaved illegally, their own accounting firm’s audits didn’t catch this until it was too late.
“A responsible person will be found liable under § 6672(a) if the government can demonstrate that he had either (1) actual knowledge that the trust-fund taxes were not paid and the ability to pay the taxes, or (2) recklessly disregarded known risks that the trust-fund taxes were not paid. In other words, for a responsible person to be deemed to have acted willfully under § 6672(a), he must have either “had knowledge of the tax delinquency and knowingly failed to rectify it when there were available funds to pay the government,” Gephart, 818 F.2d at 475 (citation omitted), or “deliberately or recklessly disregarded facts and known risks that the taxes were not being paid.'”
““’But willful conduct may also include a reckless disregard for obvious or known risks.” Calderone, 799 F.2d at 259–60 (citation and internal quotation marks omitted). Some of our sister circuits have indicated that gross negligence may satisfy § 6672(a)’s willfulness prong, see Phillips v. IRS, 73 F.3d 939, 943 (9th Cir. 1996)”
“(“More than mere negligence is required for willfulness.”). Namely, “a person is not willful if as a result of negligence he is unaware of the default in the payment of payroll taxes.'”
“In many circuits, “[r]eckless disregard includes failure to investigate or correct
mismanagement after being notified that withholding taxes have not been paid.'”
“…a responsible person is reckless and therefore willful under § 6672(a) when he disregards obvious or known risks that trust-fund taxes are not being paid to the Treasury and fails to Investigate.”
The owners Byrne and Kus were found to be negligent but not reckless.
What this appears to establish, for the Sixth Circuit, is a case of “ignorance IS innocence” if you can prove that you’ve done everything reasonably in your power to not remain ignorant.
At the Tax Resolution Institute, a full-fledged accounting firm with expert tax attorneys on staff, we can help you avoid such situations. If you do find yourself needing IRS help, give us a call.
As usual, if you’re either a taxpayer with IRS problems or a tax professional with tax questions give us a call at (818) 704-1443 or use our handy contact form for taxpayers or tax professionals with tax questions.
*This article is presented for informational purposes only and should never be considered definitive tax or legal advice. Tax matters have serious financial implications and always benefit from expert counsel due to their depth and complexity. If you need expert tax resolution or audit help please contact the Tax Resolution Institute at (818) 704-1443 for immediate assistance.