The Internal Revenue Code requires employers to withhold certain taxes in “a special fund in trust for the United States” (sec. 7501(a)). IRS regulations require employers to pay these trust fund taxes to the IRS quarterly. Employers who fail to pay withheld taxes to the government are personally liable for the taxes under section 6672 of the Code. In general, the government can recover unpaid taxes if (1) the employer is responsible for collecting and paying withholding taxes, and (2) the individual willfully failed to collect and pay the withholding taxes. What is key is that the IRS can recover from any responsible person, not necessarily the most responsible person.
The trust fund recovery penalty is often a trap for the unwary, including for partners and shareholders of law firms, as illustrated by Spizz v. United States, 120 A.F.T.R. 2d 2017-6719 (S.D.N.Y. Dec. 4, 2017). Spizz and Todtman were shareholders of the law firm Todtman, Nachamie, Spizz & Johns, P.C., from 2009 through September 2012. The court in Spizz held that the government could hold Spizz and Todtman personally liable for the trust fund taxes the firm failed to pay between 2009 and 2012. Despite the fact that the firm was going through serious financial difficulty, the court held that both shareholders were personally liable for the trust fund taxes.
The court first turned to whether Todtman and Spizz were “responsible persons” for the firm’s payment of trust fund taxes. The court stated that the payment issue depended on whether, given the individual’s authority over the company’s financial operations, the individual could have prevented the tax delinquency.
The court found that both Todtman and Spizz were responsible persons. Todtman founded the firm, served as its president while holding one-third ownership during the relevant periods and exercised authority over the firm’s finances. Although Spizz did not make financial decisions to the same extent as Todtman, the court stated that the “inquiry focuses on whether an individual could have exerted influence” to avoid tax delinquency. The court found that Spizz was also a responsible person because he held one-third of the firm’s shares and was its vice president.
The second element of tax payment liability under section 6672 is willfulness. A person willfully fails to pay withholding taxes if payment is made to other creditors while knowing that withholding taxes are due. The court found that Todtman was aware of the firm’s responsibility to pay trust fund taxes, and that the firm was paying other creditors before the IRS. While the trust fund taxes were still due, Todtman signed checks on behalf of the firm to disburse funds for payroll and payments to creditors.
The court also held that Spizz willfully failed to remit trust fund taxes. Although he did not learn of the firm’s tax liability until June 2010, he failed to apply the firm’s unencumbered assets to the firm’s tax liability when he found out about it. The court held that this was sufficient to establish willfulness for the pre-June 2010 period. After June 2010, when Spizz became aware of the firm’s tax liability, the court held that he could no longer maintain a reasonable belief that other members of the firm would timely pay its trust fund taxes. Thus, Spizz could not claim that he did not willfully withhold trust fund taxes.