The term "person" in section 6672 includes, but is not limited to:

Regardless of a person’s corporate title, a person will not be held liable for TFRP unless he or she has the duty to account for, collect, and pay over the trust fund taxes to the government. Even an officer of the business will not be a responsible person if they are an officer in title only and have no substantive duties with the business. O’Connor v. U.S., 956 F.2d 48 (4th Cir. 1992). On the other hand, even if a person has no corporate title but has control of financial affairs or controls payment of funds by the business, that person could be held responsible for the TFRP.

A determination of liability must take into account all facts and circumstances.

A responsible person may be held 100% liable if such person willfully fails to perform any one of the three duties listed in the statute: collecting, truthfully accounting for, and paying over such taxes. Slodov v. United States, 436 U.S. 238 (1978).

The statute does not impose upon the responsible person an absolute duty to pay over amounts that should have been collected and withheld by prior responsible persons. Slodov v. United States, 436 U.S. 238 (1978).

One or more persons may be responsible persons within the meaning of IRC § 6672 for the same quarter. Thomas v. United States, 41 F.3d 1109 (7th Cir. 1994).

A determination of "responsibility" depends upon the facts and circumstances of each case. Common factors considered by the court include:

The crucial test is whether the person has the "effective power to pay the taxes owed." Purcell v. United States, 1 F.3d 932, 937 (9th Cir. 1993). A person is deemed to have such power if he/she possesses the authority to exercise significant control over the company’s financial affairs whether or not such control is in fact exercised. Purcell at 937. Significant control generally relates to the person’s status, duty, and authority in the business that failed to carry out one of the three statutory duties. Davis. V. United States, 961 F.2d 867 (9th Cir. 1992).

Those performing ministerial duties without exercising independent judgment will not be deemed responsible. P-5-60.

An unpapid, voluntary board member a of tax-exempt organization will not be considered a responsible person if such board member is solely serving in an honorary capacity, does not participate in the day-to-day or financial operations of the business, and does not have actual knowledge of the failure on which the penalty is based. IRC § 6672(e). This exception, however, does not apply if it results in no person being liable for the TFRP. See Jefferson v. United States, 459 F.Supp.2d 685 (N.D. Ill. 2006) (twenty year voluntary board president of a non-profit organization who was unpaid but did not serve solely in an honorary capacity, who had check signing authority and control of financial affairs, and who was aware that trust fund taxes had not been paid, was a responsible officer who willfully failed to pay the tax).

Under IRC § 6672(a), the failure to collect or pay over trust fund taxes must be willful.

Definition of willful — intentional, deliberate, voluntary, reckless, knowing (not accidental). No evil intent or bad motive is required. Domanus v. United States, 961 F.2d 1323 (7th Cir. 1992).

To show "willfulness," the government must show that the responsible party was aware of the outstanding taxes and either deliberately chose not to pay the taxes or recklessly disregarded an obvious risk that the taxes would not be paid. Phillips v. United States, 73 F.3d 939, 947 (9th Cir. 1996).

A responsible person's failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid satisfies the IRC § 6672 "willfulness" requirement. Finley v. United States, 123 F.3d 1342 (10th Cir. 1997).

The payment of net wages (wages minus trust fund taxes) to employees when funds are not available to pay withholding taxes is a willful failure to collect and pay over under IRC § 6672. If funds are not available to cover both wages and withholding taxes, a responsible person has a duty to prorate the available funds between the United States and the employees so that the taxes are fully paid. For purposes of determining willfulness, an employee owed wages is merely another creditor of the business, and preferences to employees over the government constitute willfulness. Hochstein v. United States, 900 F.2d 543, 548 (2d Cir. 1990).

Generally, a responsible person’s willfulness is not negated where the failure to pay was due to reasonable cause. Olsen v. United States, 952 F.2d 236 (8th Cir. 1991).

A mistaken belief that trust fund taxes do not have to be paid does not make the failure to pay non-willful. Thomsen v. United States, 887 F.2d 12, 17 (1st Cir. 1989).

The revenue officer has the initial duty of determining the identity of officers and employees who had the duty to collect or pay over the taxes.

Records to be examined include the following:

The articles of incorporation should contain the names and duties of all officers and directors of the corporation.

Corporate by-laws and minute books may disclose the names of persons responsible for the filing of the returns and payment of taxes. They may show who has the authority to sign checks, deposit money, or make loans on behalf of the corporation.

Bank records and canceled checks should be examined for payment of other financial obligations after the taxes became due.

Tax returns, if filed, may provide the name of the person responsible for filing.

Interviewing of witnesses is an important factor in TFRP investigations.

The revenue officer should prepare for the interview prior to the meeting with the witness. This will increase the chances that the interview will be successful.

When conducting an interview with a potentially responsible person, the revenue officer should determine:

If a potentially responsible person asserts a defense for failure to comply with the statutory requirements, all of the details surrounding the defense should be thoroughly questioned and subsequently verified.

IRC § 6672 is limited to the trust fund portion of the tax; that is, to the tax that the "responsible person" is required to collect or withhold from the wages of employees.

The TFRP does not apply to direct taxes such as the employer's portion of FICA or FUTA. Neither does it apply to non-collected excise taxes.

If during the investigation, the revenue officer becomes aware of facts which indicate that a lender, surety or third party may have indirectly or directly provided funds for the payment of employee wages, the revenue office should consider assertion of liability under IRC § 3505(a) or (b). See IRM 5.17.7.2, below.

Withholding and FICA Taxes

The assessment period may be extended prior to its expiration by consent of the person against whom the penalty is to be assessed. This extension, however, applies only to the consenting officer.

For further discussion of the statutory assessment period and extensions of such period, see IRM 5.7.3.5 and 5.7.3.6.

Under IRC § 6672(b)(3), an assessment statute that is open when the Service mails or delivers in person the L-1153, Notice of Proposed Trust Fund Recovery Penalty, to a responsible person shall not expire before the later of

Refer to IRM 5.7, Trust Fund Compliance Handbook, and IRM 8.11.2, Appeals Penalties, Trust Fund Recovery Penalty (TFRP).

It is the Service’s policy to collect the unpaid trust fund taxes only once.

If, after the assertion of the TFRP, the corporation pays the delinquent tax, the TFRP assessment will be abated. Policy Statement P-5-60.

Similarly, if an amount that has been collected from the responsible person(s) exceeds the amount that the corporation failed to pay, the excess may be refunded, to the person(s) that caused the excess payment, within the applicable statutory period. Refer to IRM 5.7.7.

The TFRP may be collected by levy or by a proceeding in court, but only if begun within ten years after the assessment was made. IRC § 6502(a).

The Service may no longer obtain waivers of the collection period except for those waivers secured in conjunction with an installment agreement. IRC § 6502.

Section 507(a)(8)(C) of the Bankruptcy Code (11 USC § 507(a)(8)(C)) grants eighth priority to all taxes "required to be collected or withheld and for which the debtor is liable in whatever capacity." This includes the TFRP under IRC § 6672.

Except for a superdischarge under 11 USC § 1328(a) in a Chapter 13 bankruptcy case, an individual debtor is not discharged from liability for the TFRP. See 11 USC § 523(a)(1)(A). Thus, the Service may collect any unpaid TFRP after the automatic stay terminates.

The automatic stay provisions of the Bankruptcy Code do not prevent the Service from assessing and collecting the TFRP penalty from responsible persons who are not themselves in bankruptcy. 11 USC § 362.

Responsible persons, therefore, may not enjoin assessment and collection of the TFRP against them when only the corporation is in bankruptcy. In re Prescription Home Health Care, 316 F.3d 542 (5th Cir. 2002) (holding that the bankruptcy court does not have jurisdiction over a nondebtor responsible officer).

IRC § 3505(a) makes third parties personally liable for the payment of withholding taxes where they pay wages directly to employees of another.

IRC § 3505(a) applies to lenders, sureties, or other persons.

Liability under IRC § 3505(a) extends to withholding under:

Liability does not extend to the employer's share (because the person liable under this section is not an employer), nor does liability extend to penalties which the Service may impose on the employer.

IRC § 3505(a) does not relieve an employer from responsibilities with respect to withholding taxes. The responsibilities continue even though a lender may be paying the employees' wages. The liability of the lender in such a case is to pay the taxes only where the employer does not do so.

When evaluating whether wages are being paid directly, the Service and the courts look to the "substance" of the transaction and may find the direct payment of net wages present, even though a "subterfuge" is used to attempt to disguise the substance of the arrangement. See United States v. Kennedy Construction Co. of NSB, Inc., 572 F.2d 492 (11th Cir. 1978).

IRC § 3505(b) provides that a lender, surety, or other person who supplies funds to or for the account of an employer for the specific purpose of paying wages of the employees of such employer may be personally liable for any unpaid withholding taxes even though this person does not directly pay the employees’ wages.

A person within the meaning of section 3505(b) includes:

Before a person can be liable under section 3505(b), the following two conditions must exist.

It is the Service’s position that notice to, or knowledge by, any agent of a third-party supplier of funds is imputed to the third party This is true even if the agent conceals the facts from the supplier. United States v. Park Cities Bank and Trust Co., 481 F.2d 738 (5th Cir. 1973).

Under IRC § 3505(b), the liability of the third party may not exceed 25 percent of the amount supplied to the employer for the specific purpose of paying wages.

The employer remains responsible for filing returns (Form 941).

Payments by the lender of withholding taxes reduces the liability of an employer. Similarly, payments by an employer of the withholding taxes reduces the liability of the lender.

Under both IRC §§ 3505(a) and (b), if the person liable does not voluntarily satisfy the liability, the government may collect such liability by a court proceeding only.

Do not overlook the possibility that alternative remedies exist, particularly the assertion of the Trust Fund Recovery Penalty. See United States v. Security Pacific Business Credit, Inc., 956 F.2d 703 (7th Cir. 1992);Muller v. Nixon, 470 F.2d 1348 (6th Cir. 1972), cert. denied, 412 U.S. 949 (1973); Turner v. United States, 423 F.2d 448 (9th Cir. 1970).