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Ups and Downs

It’s wonderful to be part of a successful business, especially in a strong economy. The owners are probably enjoying a more than just decent return on their investment and, in most cases, are getting along well enough. The business’s employees feel secure in their position; hopefully, they also feel valued.

This rosy picture can change rather quickly, however, when the overall economy, or the industry in which the business operates, experiences a downturn.[i]

In that case, the once successful business may encounter some difficult times. For example, its operating revenue may drop while its costs increase. At the same time, the business may find that rising interest rates have made it too expensive to finance certain expenditures or investments; in addition, lenders may be more cautious about make loans to such a business.[ii]


Under these circumstances, some business owners or key employees who are looking for sources of cash that may be used to satisfy the obligations of the business may feel compelled to engage in some ill-advised “self-help.”

Specifically, they may decide to borrow – i.e., divert – some of the payroll taxes withheld from their employees’ wages (“trust fund” taxes) in the hope of keeping the business afloat until it turns the proverbial corner.[iii]

Unfortunately, that corner too often turns into a spiral, the business fails, and the IRS seeks to collect the unpaid trust fund taxes from those individuals in the business whom the agency determines were responsible for collecting and remitting the taxes. There may be several such individuals to whom the IRS will look for payment – both owners and non-owner executives – and it is not unusual to find these once-friendly business associates blaming one another and pointing fingers so as to deflect responsibility away from themselves.[iv]

A recent decision by a federal district court illustrated the mess in which a so-called “responsible person” – in this case, a corporation’s president (“Taxpayer”) – may find themselves when the corporation (Corp) fails to make the required payments (or deposits) of trust fund taxes.[v]

The Facts

At the time Corp was formed, Taxpayer owned twelve percent of the business and was the chairman of its board of directors. Taxpayer remained the chairman throughout the periods for which there was an underpayment of tax question. He also served as president during most of these periods. More recently he was the sole member of Corp’s board and the chief executive of the business.

During the periods in question, Corp did not fully pay its federal payroll taxes. What’s more, Taxpayer was aware these taxes were owed but continued to pay other creditors.

Taxpayer was assessed trust fund recovery penalties for each of these tax periods.[vi] Taxpayer then filed an action to challenge the assessment and to obtain a refund for amounts already paid. Taxpayer claimed he could not be liable for the taxes in question because he was not a responsible person under the Code and, even if he was, did not willfully fail to pay over the taxes withheld.

The government moved for summary judgment to establish Taxpayer’s liability for the withheld but unremitted payroll taxes.

Before considering the Court’s decision, let’s review the basics of the trust fund penalty.


The Code imposes the FICA tax[vii] on employees’ wages. FICA taxes consist of “social security” taxes[viii] and “Medicare” taxes.[ix] 

The social security portion of the tax includes an employee portion that is imposed at a rate of 6.2% of wages received by employees and an employer portion imposed at a rate of 6.2% of wages paid by employers.[x] 

The Medicare portion of the tax includes an employee portion imposed at a rate of 1.45% of the wages received by employees[xi] and an employer portion imposed at a rate of 1.45% of wages paid by employers.[xii]

The social security portion of FICA tax is only imposed on wages up to the social security wage base for the year.[xiii] There is no such wage base for the Medicare portions of FICA tax.[xiv]


In order to assist the IRS in the collection of the FICA taxes imposed on an employee’s wages, employers generally must withhold from their employees’ wages the federal social security and Medicare taxes owing by such employees on account of such wages.[xv] These taxes are called “trust fund” taxes because employers hold the employee’s money in trust until making a quarterly deposit of the tax amounts withheld.

The amounts withheld by an employer must be paid over to the IRS (“deposited”) in accordance with the applicable deposit schedule. To encourage the prompt payment by employers of the withheld income and employment taxes, the Code provides for the so-called trust fund recovery penalty (“TFRP”) under which an individual who is responsible for withholding, accounting for, or depositing these taxes, and who willfully fails to do so, can be held personally liable for a penalty equal to the full amount of the unpaid trust fund tax, plus interest.

Thus, if an employer fails to collect the appropriate amount of tax (for example, as result of having misclassified service providers as independent contractors) or collects the tax but fails to remit it (as in the case of the self-help scenario described earlier), and the unpaid trust fund taxes cannot be immediately collected from the business, the TFRP may be applied to the employer’s responsible person or persons. Where there is more than one responsible person, the Code imposes joint and several liability on each responsible person.[xvi]

From Bad to Worse?

It should be noted that the employer’s business does not need to have ceased operating in order for the TFRP to be assessed. Indeed, it may be that, in some cases, a business has survived only because the withheld taxes have not been remitted to the IRS but have, instead, been used to pay other expenses of the business.

In many other cases, however, the imposition of the TFRP, plus interest, has led to the demise of the business. Although this result may seem harsh, it is probably the correct outcome from an economic perspective. A business that cannot survive on its own should not be able to divert withheld tax amounts toward its own private use. As one IRS agent put it to me many years ago, a taxpayer should go out of business rather than fail to satisfy its tax obligations.[xvii]

With the foregoing background, let’s return to the Court’s decision.

Summary Judgement

As mentioned above, the government moved for summary judgment to establish Taxpayer’s liability for the withheld but unremitted payroll taxes.[xviii] As stated above, there are two conditions that must be satisfied to establish liability: the individual in question was a responsible person and their failure to pay the tax was willful.

Summary judgment, the Court explained, was appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”[xix] There is no genuine issue for trial, the Court continued, unless there is sufficient evidence favoring the non-moving party for a jury to return a verdict in that party’s favor. The moving party has the initial burden of showing the absence of a genuine issue of fact for trial. If the moving party meets its initial burden, the non-moving party must go beyond the pleadings and “set forth specific facts showing that there is a genuine issue for trial.” 

In addition to showing there are no questions of material fact, the moving party must also show it is entitled to judgment as a matter of law. The moving party is entitled to judgment as a matter of law when the non-moving party fails to make a sufficient showing on an essential element of a claim on which the non-moving party has the burden of proof. The non-moving party cannot rely on conclusory allegations alone to create an issue of material fact. When considering a motion for summary judgment, a court may neither weigh the evidence nor assess credibility; instead, “the evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor.” 

Legal Standard

The Code requires employers to withhold federal income and social security taxes from the wages of their employees.[xx] The amounts withheld constitute a special fund held in trust for the benefit of the federal government and are to be paid over quarterly.[xxi] 

With respect to an employer that fails to comply with this duty to withhold and remit, the Code provides, in relevant part:

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.[xxii]

In other words, the IRS may assess a 100 percent penalty on those responsible persons who willfully fail to collect, account for, and pay over the payroll taxes to the government.

An individual is liable under this provision if they (1) were a “responsible person,” and (2) acted willfully in failing to collect or pay over the withheld taxes. 

The individual against whom the assessment is made bears the burden of proving by a preponderance of the evidence that one or both of the elements of responsibility and willfulness is not present.

Disputes of Material Fact

Taxpayer claimed that summary judgment was improper because there were factual disputes as to his control over Corp’s finances – he contended he was not a responsible person – and whether he willfully failed to pay over the withheld taxes.

The Court, however, replied that the material facts of the case were not genuinely disputed. Moreover, according to the Court, Taxpayer provided “only conclusory assertions that he was not responsible for the finances and accounting of the company and that he did not act willfully in paying other creditors before the federal government. “The record evidence,” the Court added, demonstrated otherwise: Taxpayer was the chairman of the board of directors and president of Corp. In that capacity, Taxpayer made voluntary, conscious decisions to pay other creditors first. The Court stated that Taxpayer’s self-serving assertions in opposition to summary judgment were uncorroborated and were insufficient to create a genuine dispute of fact. 


A responsible person 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.”[xxiii]

A responsible person, the Court explained, is one who has the “final word as to what bills should or should not be paid and when.” The “final word” does not actually mean final, but instead “the authority required to exercise significant control over the corporation’s financial affairs, regardless of whether [the individual] exercised such control in fact.” It means significant, rather than exclusive control.[xxiv] 

“[R]esponsibility is a matter of status, duty, and authority, not knowledge,” the Court stated. “Authority turns on the scope and nature of an individual’s power to determine how the corporation conducts its financial affairs; the duty to ensure that withheld employment taxes are paid over [to the government] flows from the authority that enables one to do so.” 

To determine whether an individual is a responsible person, the Court stated, the following factors are typically considered: (1) the individual’s duties as outlined in the corporate bylaws; (2) the individual’s ability to sign checks on the corporation’s bank account; (3) the individual’s status as an officer, director, or principal shareholder; (4) whether the individual could hire and fire employees; and (5) whether the individual had significant control over the finances of the business.

At the time of Corp’s incorporation until the present, Taxpayer was the chairman of its board of directors. The Court observed that, as such, Taxpayer ensured Corp made payments on specific loans.

And while Taxpayer generally denied he was “involved” in preparation of Corp’s tax returns, he admitted he likely signed them. Taxpayer also did not dispute that, at all times, he directed and supervised Corp’s Treasurer, who would prepare Corp’s tax returns.

Taxpayer served as Corp’s president for many years and served as chairman of the board since the corporation’s founding. Taxpayer’s authorization was required for certain payments and transmittal of tax returns, he approved salary increases for employees, he could draw upon the corporation’s line of credit to pay bills, and made decisions about which creditors to pay first.

Taxpayer argued that other Corp employees primarily controlled the business’s finances. The Court, however, pointed out that Taxpayer did not need exclusive control over Corp’s financial affairs to be a responsible person under the Code. 

Taxpayer also disputed that he was responsible for signing checks because, most of the time, his signature was computer-generated and stamped by employees of Corp as a matter of routine. Whether Taxpayer personally signed every check issued by the company did not demonstrate Taxpayer lacked authority to do so, which was the central issue to liability. Taxpayer’s signature was stamped on these documents because he was one of a few individuals that had such authority.

Having determined that Taxpayer was a responsible person, the Court then considered he acted willfully.


To determine willfulness, one may look to the responsible person’s actions after they learn of the tax debt. A responsible person acts “willfully in failing to collect or pay over the withheld taxes” if there is a “voluntary, conscious, and intentional act to prefer other creditors over” the federal government while they are aware that such funds are owed to the government. “A mistaken belief on the part of the responsible person that the tax need not or cannot be paid over does not suffice to render the failure to pay non-willful.” 

However, willfulness need not be in bad faith, nor does it require actual knowledge of the tax delinquency. Indeed, reckless disregard of whether taxes are being paid over, in contrast to actual knowledge of whether they are being paid over, may suffice to establish willfulness.[xxv] “Reckless disregard” includes failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid.

Taxpayer was aware of Corp’s tax debt during his tenure as chairman and president, yet he made voluntary, conscious, and intentional decisions to prefer other creditors before satisfying those tax liabilities.

Taxpayer regularly met with the board of directors and other executives to discuss unpaid bills, including payroll tax liabilities. Minutes from several Corp board meetings mentioned the payroll taxes due to the IRS. At these meetings, the board discussed penalties from the IRS for the delinquent tax payments and the fact that Corp was behind on its plan to address its tax liabilities.[xxvi]

After he became aware of the tax liabilities, Taxpayer ensured Corp made payments toward employee salaries and loans. Taxpayer disbursed funds for payroll from other entities he controlled when Corp was cash deficient. He also authorized payments on a loan from a bank, which he had personally guaranteed. Thus, he continued to prefer other creditors over the government.

Based on the foregoing, the Court found that no material facts were in dispute. It granted the government’s motion for summary judgment, and declared that Taxpayer was liable for trust fund recovery penalties, plus interest and other statutory accruals.


Owners will do what they can to keep their businesses viable. Although the great majority of owners will remain within the law, a not insignificant number may consider, and ultimately follow through with, a “strategy” that is often utilized by businesses in distress: failing to remit to the taxing authorities those taxes that the business has withheld or collected on their behalf – typically, the employee’s share of employment taxes on wages paid by the employer, as well as state and local sales taxes.

It’s imperative that business owners resist taking this path. It is equally important that they implement safeguards to ensure that no one of them, or any of their key employees, is able to unilaterally divert any kind of withheld taxes toward the payment of business expenses. After all, the federal government is not in the business of making loans to taxpayers.

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The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.

[i] According to the Conference Board’s September 2023 Economic Forecast for the US Economy:

“US economic growth will buckle under mounting headwinds early next year, leading to a very short and shallow recession. This outlook is associated with numerous factors, including, elevated inflation, high interest rates, dissipating pandemic savings, mounting consumer debt, lower government spending, and the resumption of mandatory student loan repayments. We forecast that real GDP will grow by 2.2 percent in 2023, and then fall to 0.8 percent in 2024.

“US consumer spending has held up remarkably well this year despite elevated inflation and higher interest rates. However, this trend cannot hold, in our view. Compensation growth is decelerating, pandemic savings are dwindling, and household debt is rising rapidly. Additionally, new student loan repayment requirements will begin to impact many consumers starting in October. Thus, we forecast that overall consumer spending growth will slow towards yearend and then contract in Q1 2024 and Q2 2024.”

[ii] Sounds familiar?

[iii] Why would a business engage in such illegal behavior? The reasoning goes something like this: “Revenues were down. We just needed some time to recover – the tax money was going to help us sustain the business until it became profitable once again. At that point, we would have paid the taxes owing.” 

There are times, however, in which this decision is not adopted as a matter of “company policy” but, rather, is undertaken by only one well-positioned owner or officer of the business, often unbeknownst to the others. 

[iv] The IRS can go after any of these individuals or all of them simultaneously.

[v] Taylor v. U.S., No. 2:17-CV-00410-SAB, Signed July 12, 2023.

[vi] Under IRC Sec. 6672.

[vii] Federal Insurance Contributions Act.

[viii] Old-Age, Survivors, and Disability Insurance taxes. 

[ix] IRC Sec. 3101(b)(1); RC Sec. 3111(b).

[x] RC Sec. 3101(a); IRC Sec. 3111(a).

[xi] IRC Sec. 3101(b)(1).

[xii] IRC Sec. 3101(b)(1), 3111(b).

Effective for tax years beginning after December 31, 2012, employees are also subject to Additional Medicare tax (“AdMT”) imposed at a rate of 0.9% upon wages received by an employee in excess of enumerated dollar thresholds that are dependent upon each employee’s filing status in a calendar year. See IRC Sec. 3101(b)(2).

[xiii] For 2023, the amount of wage income that is subject to the social security tax is capped at $160,200. 

You may recall that the administration’s ill-fated Build Back Better proposal sought to eliminate the cap entirely.

[xiv] IRC Section 3121(a)(1).

[xv] As distinguished from the employer’s share of FICA tax.

[xvi] A person who has paid the penalty may seek contribution from other responsible persons who are liable.

[xvii] The government is not a bank, he added.

[xviii] It’s not often that a tax guy gets to write about summary judgement.

[xix] Fed. R. Civ. P. 56(a).

[xx] IRC Sec. 3402.

[xxi] IRC Sec. 7501(a).

[xxii] IRC Sec. 6672.

[xxiii] IRC Sec. 6671(b).

[xxiv] Exclusive control is not necessary.

[xxv] “Reckless disregard” includes failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid. Willfulness need not be in bad faith, nor does it require actual knowledge of the tax delinquency.

[xxvi] Taxpayer claimed the board minutes referenced other tax liabilities, but this claim was purely self-serving; the board conversations occurred when the IRS penalties in the present matter were accruing, and Taxpayer did not proffer any corroborating evidence to indicate there were separate tax liabilities.