The IRS is serious about unpaid employment taxes. The trust fund recovery penalty can be used to collect these taxes. This penalty makes a business tax liability a personal liability. With most penalties, the penalty can be abated for reasonable cause. But what about the trust fund penalty? Can it be abated for reasonable cause? The court addresses this in United States v. Liddle, Case No. 14-cv-04761-BLF (N.D. Cali. 2017).

Facts & Procedural History

As you probably guessed, this is a trust fund recovery penalty case. The trust fund penalty was imposed on a CEO who admitted that his company failed to pay its employment taxes. The only question was whether reasonable cause is a defense to trust fund recovery penalties.

Who Is Responsible for Withholding?

Businesses must withhold employment taxes from wages paid to their employees. If they do not pay the withholdings over to the IRS, the IRS may assess a trust fund recovery penalty against the responsible persons. The responsible persons include anyone who has authority or power to determine who the businesses pay. The trust fund recovery penalty is a individual obligation owed by the responsible person, not the business.

The responsible person must have acted willfully to be subject to the penalty. The term willfulness has been defined as a voluntary, conscious and intentional act to prefer other creditors over the United States.

As noted by the court, courts in other Circuits have concluded that reasonable cause can show that the person did not act willfully and, as such, reasonable cause can be a defense to trust fund recovery penalties. The court cited opinions from the Fifth, Tenth and Second Circuit Courts for this. The court went on to note that the Ninth Circuit, whose law applied in this case, did not provide for such a defense.

Where the Taxpayer Lives, Matters

Because the taxpayer agreed that the other elements were satisfied in this case, the court concluded that he was liable for the trust fund recovery penalties. So the answer is that there is no reasonable cause defense to the trust fund penalty for taxpayers located in the Ninth Circuit.

The Ninth Circuit law applies to taxpayers located in California, Arizona, New Mexico, Nevada, Idaho, Washington, Oregon, and Montana. The Fifth Circuit includes Texas, Louisiana, and Mississippi. The Tenth Circuit includes Colorado, Kansas, New Mexico, Oklahoma, Utah and Wyoming. The Second Circuit includes New York, Connecticut, and Vermont.

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