Accountant’s embezzlement was not reasonable cause to relieve Owners from trust fund penalty as responsible person

The U.S. Court of Appeals for the Eighth Circuit (Illinois is in the Seventh Circuit) in a recent case granted summary judgment to the IRS, ruling that the owners of a company were the “responsible persons” subject to a $2 million trust fund recovery penalty for failing to timely remit employment taxes. This was despite the owners’ assertion that their accountant had embezzled funds, which deprived them of the opportunity to make informed decisions.

The IRS proposed an assessment of the trust fund recovery penalty against the owners of the company as “responsible persons” for the corporate withholding tax obligation. Under Code Sec. 6672(a), if an employer fails to properly pay over its payroll taxes, the IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a responsible person or persons. The responsible person(s) is the person who: (1) is responsible for collecting, accounting for, and remitting of payroll taxes; and (2) willfully fails to perform this responsibility. In determining whether there is willfulness for purposes of Code Sec. 6672(a), the courts have focused on whether a taxpayer had knowledge about the non-payment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made to the government.

In the Eight Circuit case the Court found that in 1992, James and Gayle Oppliger formed Double O, a trucking business, and served as the sole owners, directors and primary officers of the company. In 1997, the Oppligers formed LFC, a payroll company for Double O. The Oppligers were the sole members of LFC.

In 1996, the Oppligers hired Mary Kerkman to perform accounting and bookkeeping services for Double O and then LFC. The Oppligers delegated to Kerkman the tasks of filing employment tax returns and paying payroll taxes. Kerkman regularly provided the Oppligers with weekly reports that informed them of the companies' financial situations. Kerkman committed suicide on April 3, 2002. After her death, the Oppligers learned that Kerkman had embezzled $10,000 from the companies.

On April 4, 2002, the day after Kerkman's death, an IRS Revenue Officer informed the Oppligers that LFC employment taxes had not been paid to the government for 13 consecutive quarters and Double O employment taxes had not been paid for 17 quarters. The Oppligers claimed that this was when they first learned that Double O and LFC had not been paying employment taxes.

After the Oppligers were informed by the Revenue Officer of the liability and prior to their closing the business on September 1, 2002, the businesses paid $2,117,640.43 to its employees and $3,240,138.60 to third-party creditors. The IRS then assessed penalties under Code Sec. 6672 against the Oppligers for LFC's unpaid taxes in the amount of $2,363,704.25, and Double O's unpaid taxes in the amount of $27,013.21. The Oppligers naturally argued that they should not be liable for the unpaid taxes. A federal district court granted summary judgment to the IRS, stating that there were no genuine issues of material fact regarding whether the Oppligers were responsible persons under Code Sec. 6672. The district court also determined that the Oppligers willfully failed to pay the employment (trust fund) taxes because they admitted that after the IRS informed them of their outstanding tax liabilities, that they paid employees and third parties over $5 million.

The Oppligers appealed the district court’s ruling and the Eighth Circuit held that the Oppligers were responsible persons under Code Sec. 6672 because they had the status, duty, and authority to pay the trust fund taxes. The Eighth Circuit was not persuaded by the Oppligers' claim that Kerkman's misconduct deprived them of the opportunity to make informed decisions by noting that whether Kerkman may have been a responsible person under Code Sec. 6672 is immaterial to the Oppligers' liability since they were both responsible persons for purposes of the penalty and that the Oppligers had willfully failed to pay the trust fund taxes. Their decision to pay employees and other creditors, rather than the U.S. government, constituted a willful failure to pay the taxes under federal law.

If you would like more details, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS and IDOR collection problems for over 20 years. Please call our office and ask for Brittany at (847) 705-7555 to talk to one of our attorneys in the tax practice group and find out how we can help your client in front of IRS collections.