Posted by: euser
November 12, 2010
Topic: Legal News

I recenly made a presentation t the Florida Institute of Certified Public Accountants on current paytoll tax developments and issues. A copy of the outline is posted below:

FLORIDA INSTITUTE ON FEDERAL TAXATION CONFERENCE ORLANDO

2010

EMPLOYMENT TAX ISSUES ©

John G. DeLancett, Esq./Law Offices of JOHN DELANCETT, PL

I. The Why? - Revenue

A. 60 % of all Federal revenue comes from employment taxes.

1. Employment Taxes include: (a) withholding, (b) FICA, (c) FUDA, (d) self-employment (e) back up withholding.-IRS Data Book 2009

2. It is estimated that there is an $86 billion gap in the amount of employment taxes that should be collected and the amounts that are actually collected. IRS Tax Gap Map

B. As a result, the government has a very strong interest in seeing to it that individuals are properly classified as employees.

C. Further, under the new health care law, all employees will have to be insured. Therefore, in order to make it successful, the government needs as many people to be employees as possible.

II. The When - The National Research Project

A. Accordingly, the government has instituted a new National Research Program (NRP) focused on employment tax issues. The last one the government did on employment taxes was in 1984. The new program began in March of 2010.

B. The NRP is going to audit 6,000 taxpayers over 3 years. The audits will be through random selection and directed to all sizes of employers. Among the 6,000 to be audited, 500 will be non profit employers, 330 will be governmental entities, and 36 will be universities. The NRP audit will focus on worker classification, fringe benefits, expense reimbursement, officer compensation, and other related issues. They will be very comprehensive audits. . The IRS has drawn approximately 200 agents from all 40 divisions of the IRS for these NRP audits. The objective is to seek information about trends so as to focus future audits.

C. IRS will be looking hard at worker classification. Although the IRS normally looks at whether or not §530 relief would be available upfront, and, if so, would not engage in worker classification, they will be doing so in these NRP audits in order to determine the size of the problem.

D. Other issues that the NRP will be looking at are underreporting and late deposit trends. One of these items will be the accuracy of W-2 reporting. The IRS has very sophisticated examination techniques, including using computer audit specialists. They will be using these to determine whether some work may have been treated as wages and then subsequently treated as an independent contractor or vice versa.

E. In addition to the IRS there are other implications from these audits; (1) social security and Medicare taxes, (2) Department of Labor and related State employment authorities, including unemployment insurance, minimum wage, and overtime rules, worker's compensation insurance and coverage under employee benefit plans. (3) written policies for employee benefits, non qualified deferred compensation, expense reimbursement policies and procedures, and application of Section 274 expense deduction limitations.

III. The How - Part One - Reclassification

A. Employee Reclassification. "Worker Classification is the bread and butter of employment tax enforcement", Jeannine Cook, Internal Revenue Service, Office of Chief Counsel.

1. Employee reclassification occurs when the government reclassifies workers who have been previously treated as independent contractors, as employees. This generally occurs through two methods, (a) payroll tax audits and (b) the filing of Form-SS8.

(a) Form SS-8 is filed by either an employee or employer asking the IRS to reclassify individuals as employees. The IRS receives about 10,000 a year. It takes approximately 6 months to process them. Not surprisingly, most of them result in a determination that the individual is an employee.

(b) If a worker files a Form SS-8, the IRS will contact you and provide you a Form SS-8 along with a letter asking your client to answer a number of questions and to provide a number of documents. These documents will include: (1) written agreements with the worker, (2) all 1099's filed for the worker, and (3) and other written documents pertinent to the issue. The questionnaire is worded in such a way as to prompt your client to hang himself. You will also find questions inquiring as to how many other individuals you have treated in the same fashion work for you. In other words, the particular worker may just be the tip of the iceberg.

2. Other consequences resulting from redetermination by the IRS include:

(a) Whether the individual or individuals involved were entitled to employee insurance coverage,

(b) Whether or not the individuals involved were entitled to retirement benefits and, therefore, is your retirement plan in danger of being disqualified, and

3. As some indication of the importance of this issue, the Obama administration has allocated 3 times as much space in its budget proposal for 2010/2011 for worker classification as it did for economic substance enforcement. Approximately $25 Million is being allocated to the Department of Labor and State Employment authorities for the corresponding employment issues related to worker's classification.

4. The primary issue in determining whether a worker is an employee is whether the employer has the authority to control how the worker does their work. It is not necessary that they actually control it, only that they have a right to control it.

5. The IRS has historically used twenty questions to try to determine whether or not the worker was, in fact, an employee. These are set forth in Revenue Ruling 87-41, 1987-1 C. B. 296. The questions were designed to ferret out the details of the working relationship in an effort to determine how much control was being exercised over the worker, in particular, as to how the work was performed. No one factor was controlling and the IRS now gives a number of these factors less importance in light of modern business technology and practices. See IRS Training Manual 3320-102 (October 1996).

6. More recently, the IRS has developed so-called primary categories of evidence. These include:

(a) Behavioral control - Those facts which show whether there is a right to direct or control how the worker does the work.

(b) Financial control - Those facts which demonstrate whether there is a right to direct or control the business aspect of the work.

(c) Relationship of the Parties - Those facts that demonstrate how the business and the workers, themselves, perceive their relationship.

(d) These are further broken down into zones described as: (1) details of work performance, (2) expenses, (3) compensation for work performance, (4) benefits, (5) duration of work, and (6) location of the work. These zones are then further broken down into additional sub categories that, in many instances, very closely resemble the so-called twenty questions. IRS Training Manual 3320-102 (October 1996).

B. Section 530 Relief

1. Section 530 provides an employer with potential relief for its allegedly erroneous past treatment of workers as non-employees. Section 530 was never codified; it was supposed to be in effect for a limited period of time but has been indefinitely extended.

2. Requirements for §530 Relief - the taxpayer has to show the following:

(a) The taxpayer had a reasonable basis for not treating the individual as an employee.

(b) The taxpayer filed all Federal tax returns (such as 1099's) required with respect to that individual which reflect that the individual was treated as a non-employee.

3. In determining reasonable basis for not treating the individual as an employee there are three safe harbor positions:

(a) Judicial precedent, published rulings, or technical advice.

(b) A past IRS audit did not question the employment tax treatment of the individual (nor individuals holding similar positions). After 1996, the examination must have, specifically, related to employment tax.

(c) Reliance on a long-standing recognized practice of a significant segment of the industry in which the employer is engaged. The Obama administration is in the process of attempting to either eliminate, or significantly limit this last category of reasonable basis.

(d) An other reasonable basis is the taxpayer may rely on the advice of an accountant or an attorney familiar with the facts of his business.

4. The relief granted consists of lower tax rates. If 1099's were issued, the tax rate is 1.5%, and the FICA liability is 20% of the employee's share plus 100% of the employer's share. If 1099's were not issued, the income tax rate becomes 3%, and the FICA rate is 40% of the employee's share and 100% of the employer's share.

5. Even if the taxpayer does not qualify for §530 Relief, there is another potential source of relief under the Classification Settlement Program or CSP.

This is discussed in the Internal Revenue Manual, Sections 4.23.6.10 et seq. The Collection Settlement Program, which provides a favorable settlement rate, usually limits the exposure of the employer to the most recently reported tax year. The trade off, however, is the business must agree to treat those individuals as employees in the future.

C. How will this affect preparers going forward?

1. Be prepared to reflect legitimate differences between employees and independent contractors.

2. Encourage employers not to alienate the workers as they probably will be interviewed.

3. Gather and review those documents which the IRS agent will be examining to determine proper classification.

4. Review workers payments. Pay attention to the frequency of payments and how they are determined, i.e., is it a salary or a payment on a piecemeal basis?

5. Review Forms 1099 to see if they were properly prepared and issued.

6. Consider the possibility of a voluntary disclosure? Consider preparing a request for abatement of penalties, consider filing amended returns.

III. The How - Part Two - Trust Fund Penalty -Section 6672

A. The Rule

1. IRC § 6672 provides that "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 for a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over."

2. It is usually applied to income tax withholding or social security tax, but can be applied to any other taxes required to be withheld or collected. The amount of tax collected or withheld by the employer is a special fund held in trust for the United States. IRC §7501 (a). (Hence, the "trust fund recovery penalty").

3. The employee receives credit for the withheld amounts and, therefore, the government may not receive payment unless it can collect under the provisions of the statute. Slodov v. United States, 436 U.S. 238, 243 (1978). Accordingly, §6672 is often interpreted as a collection device more than as an improper action on the part of the person against whom it is assessed. Caterino v. United States, 794 F. 2d 1 (1^st Cir. 1986).

4. It can also be applied where there was no withholding because of employer misclassification of workers as independent contractors. See In re: Smith, 99-1 USTC Para. 50, 10, 278 (Bank. D. Haw. 1999).

5. It is sometimes called the 100% penalty because it is equal to 100% of the tax withheld.

B. General Rules of Liability.

1. More than one person may be assessed the penalty. Turner v. United States, 423 F. 488 (9^th Cir. 1970).

2. All persons assessed the penalty are jointly and severally liable; that is, they are each liable for the full amount. Brown v. United States, 591 F. 2d 1136 (5^th Cir. 1979).

3. A right of contribution exists among those persons deemed liable for the penalty.

IRC § 6672(d)

4. Any payment made by an individual assessed for the trust fund penalty is not deductible for federal income tax purposes. Duncan v. Commissioner, 68 F. 3d 315 (9^th Cir. 1995).

5. A trust fund penalty assessment is not dischargeable in bankruptcy. 11 U.S.C. §507 (a) (8) (C).

6. Since a sole proprietor is directly liable for withheld federal income taxes and FICA taxes, the 100% penalty does not apply as it is superfluous. IRC § 3403; 3102(b)

7. If a state's partnership laws make all partners jointly and severally liable for debts of the partnership, the IRS may not be required to prove that a partner is liable under §6672, although that option remains.

8. There is no requirement that the IRS first collect from the employer before proceeding to collect against individuals. Hornsby v. Commissioner, 588 F. 2d 952 (5^th Cir. 1979); Hochstein v. United States, 900 F. 2^nd 543 (2^nd Cir. 1990).

C. Responsible Person

1. In the analysis as to whether there is liability under §6672, there are two major issues: a) responsible persons and b) willfulness.

(a) A responsible person can be virtually anyone who controls the decision making process as to which creditors are paid. This is sometimes referred to as the person having the final word or authority over financial affairs. The Service's position is that the low standard of conduct necessary to trigger responsible person liability is not based solely on the responsible person's conduct, but it is, in fact, a device to secure the collection of revenue rightfully due from the employer and is strictly an enforcement mechanism. See CM 200532046.

(b) Expressions of the test for a responsible person run the gamut from whether you have the power to avoid a default in the payment of a tax to having ultimate authority to control the financial decisions to whether you have the power to compel or prohibit allocation of corporate funds.

2. Applying the tests to individuals.

(a) Usually, the cases focus on the functional issue of whether the individual exercised control, especially over disbursement of funds and priority of payments. However, sometimes the naked legal power to act is sufficient.

(b) The government bears the burden of proving that the taxpayer is a responsible person; but, once this is established, the burden shifts to the taxpayer to prove that its failure was not willful. Mazo v. United States, 591 F. 2d 1151 (5^th Cir. 1979).

(c) Usually, volunteers or unpaid members of any board of trustees or directors of tax exempt organizationswill not be assessed, provided that they are solely serving in an honorary capacity. However, if the volunteer is involved in the financial operations or day to day conduct of business, they may still be deemed liable. Holmes v. United States, 2004-2 USTC Para. 50, 301 (S.D. Texas 2004).

(d) Whether or not an individual is deemed to be responsible is a question of fact. Merchants National Bank of Mobile v. United States, 878 F. 2d 1382 (11^th Cir. 1989). But, see Barnett v. Internal Revenue Service, 988 F. 2d 1449 (5^th Cir. 1993) (a jury verdict was reversed on appeal because the issue of responsibility was held to be a matter of law).

(e) Liability for the collection of trust fund taxes arises when the taxes are withheld, not when the return is due. Therefore, resigning prior to the due date of the return will not avoid liability. Kalb v. United States, 505 F. 2d 506 (2d Cir. 1974).

(f) Check writing authority is often an important indication that a person is a responsible party. However, the mere mechanical duty of signing checks does not impose liability where there is no actual control over the organization's funds. Werner v. United States, 374 F. Supp. 558 (D. Conn. 1974); Vinick v. United States, 205 F. 3d 1 (1^st Cir. 2000); Williams v. U.S., 931 F. 2d 805 (11^th Cir. 1991).

(g) A frightening aspect of is that an individual may be responsible if he merely had the authority to exercise significant control over financial affairs regardless of whether he, in fact, exercised that control. In re: Marino, 311 B. R. 111 (M.D. Florida 2004); Schlicht v. United States, No. CIV-05-1606 (D. Az. 2005); Hartman v. U.S., 532 F. 2d 1336 (8^th Cir. 1976).

(h) Typically, the penalty will be assessed against officers, directors and shareholders of a corporation, if they exercise significant control over the corporation's financial affairs. Merely holding an official title does not necessarily render the individual a responsible person. Winter v. United States, 99-2 USTC Par. 50, 955 (2nd Cir. Nov. 8, 1999); 26 U. S. C. A. §6671 (b). On the other hand, not holding an official title does not necessarily mean an individual will not be classified as a responsible person if they had the requisite control. Stuart v. United States, 337 F. 3d 31 (1^st Cir. 2003).

(i) In one case an individual was held responsible because he arranged or guaranteed loans for a business and, upon the general manager's abandonment of the company, assumed the responsibility of mailing and signing the tax returns. Caterino v. United States, 794 F. 2d 1 (1^st Cir. 1986).

(j) Even employees of lenders have been held to be responsible persons as well as a surety, the surety's agent, lawyers, accountants, creditors, trustees, or fiduciaries.

(k) A revenue officer is the individual who makes the initial determination of liability. This is typically done through interviews and review of documents obtained from the business. Internal Revenue Manual 5.7.3.3 sets out how a responsible person may be established. See excerpts attached as Exhibit "A".

(l) Liability cannot be escaped by showing that the collecting and paying of the taxes has been delegated to a subordinate. Likewise, abdication of responsibility by a subordinate on the ground that the person was ordered, at the risk of losing their job, not to pay withheld funds has been rejected as a defense to the penalty. This is commonly referred to as the Nuremberg defense. See Roth v. United States,779 F. 2d 1567 (11^th Cir. 1986); Howard v. United States, 711 F. 2d 729 734-735 (5^th Cir. 1983).

(m) Interestingly enough, the IRS has issued a policy statement, P-5-60 (2-2-93) which states that, if you lack any independent authority to make decisions and are acting under the dominion and control of others, you should not be a responsible person. However, the cases do not seem to necessarily follow this policy.

(n) Factors that have been considered in the cases include: (a) corporate bylaws setting forth duties of officers and directors, (b) ownership interests in the business, (c) status as an officer or director, (d) signature authority over the account, Williams v. United States, 931 F. 2d 805 (11^th Cir. 1991), (e) actual day to day management of a business, (f) hiring and firing employees, George v. United States, 819 F. 2d 1008 (11^th Cir. 1987), (g) authority to sign and file the payroll tax return and (h) unexercised authority, Tscuprake v. United States, 92-1 USTC Para. 50,429 (D. Fla. 1992).

D. Willfulness

1. Willfulness is a voluntary, conscious and intentional decision to pay other creditors instead of the United States.

(a) The best definition of willfulness is in United States v. Macagnone, 86 AFTR 2d Para. 5307 (M.D. Fla. 2000): willfulness means merely that the responsible person had knowledge of the tax delinquency and knowingly failed to rectify it when there were available funds to pay the government.

(b) This requires knowledge that the taxes are due and have not been paid. A previously unaware person that becomes aware that taxes have gone unpaid can become a responsible person if he does not then make all efforts to pay the back taxes. Thosteson v. United States, 304 F. 3d 1312 (11^th Cir. 2002).

(c) Even if no creditors are preferred, if the employer pays employees on a net payroll basis, that is; does not pay the payroll taxes and other costs associated with payroll, there can be liability.

(d) There is no requirement that there be a bad motive or specific intent to defraud the government. United States v. Beltran, 316 BR 371 (S.D. Fla. 2004)

(e) Mere negligence or a bonafide mistake does not constitute willfulness. Winter v. United States, 196 F. 3d 339 (2^nd Cir. 1999).

(g) The Eleventh Circuit has held that where one acts with reckless disregard and has actual knowledge of previous delinquencies, so as to establish a known or obvious risk that the taxes are not currently being paid, can be deemed liable. Malloy v. United States, 17 F. 3d 329 (11^th Cir. 1994); Rife v. United States, 809 F. 2d 425, 427 (7^th Cir. 1987); In re: Frye, 91 B.R. 69, 70 (Bankr. E.D. Ms. 1988).

2. If there are no unencumbered funds to pay the taxes; i.e., the funds are subject to legal obligations by law, then the failure to use those funds will not render a person willful. Huizinga v. United States, 68 F. 3d 139 (6^th Cir. 1995).

3. Some circuits have recognized a reasonable cause defense with regard to the

issue of willfulness. Unfortunately, the Eleventh Circuit has not yet joined that

group

E. Procedures for Assessment and Enforcement

1. Statute of Limitations

(a) IRC §6501 (a) imposes a general 3 year statute of limitations from the date the return is filed. If the return is false or fraudulent or if the return is not filed, the tax may be assessed at any time.

(b) For purposes of §6672, the 3 year period begins to run from the April 15 following the date that the employer's return (Form 941) is due. For example if the return is for the second quarter of 2007, the statute of limitations would begin to run on April 15, 2008 and would expire, if the returns were timely filed, on April 15, 2011. The Service has taken the position that if the return is not filed, or is false or fraudulent, then the statute of limitations is likewise extended against a responsible party. See CM 2005 32046.

(c) You may be asked to waive the statute of limitations. You should not do this unless you absolutely are convinced that you can document the fact that you will not be liable. The revenue agent has to make a decision concerning the trust fund recovery penalty no later than six months after receipt of the taxpayer delinquency account. It can be extended to one year, but no more than one year.

2. Required Notice. - IRC §6672 (b) provides that the Internal Revenue Service must send a notice of proposed assessment to any individual against whom it intends to assess the trust fund recovery penalty.

(a) The taxpayer has 60 days from the date on the notice (75 days if outside the United States) to protest the proposed penalty assessment and to request an appeals conference. One consideration for protesting the penalty is that it prevents the accrual of interest. See CA 200235028.

(b) If the taxpayer fails to appeal the proposed assessment within the time period the penalty will be assessed. Rev. Proc. 2005-34

(c) If an appeal is taken, then the statute of limitations for assessment is extended for 30 days after the Service makes a final determination on the appeal. In other words, the statute of limitations is suspended for the length of time of the appeal plus 30 days.

(d) If the appeal is rejected, the taxpayer must follow refund procedures. The United States Tax Court has no power to review the decision. Moore v. Commissioner, 114 T.C. 171 (2000).

3. Once the penalty has been assessed the IRS has ten years to collect it. IRC

§6502 (a).

F. Refund Litigation

1. A procedure applicable to the trust fund penalty provides that collection will be suspended if the responsible person pays the tax attributable to one employee for each taxable period at issue (each calendar quarter) within 30 days of the receipt of notice and demand for payment. After making this payment, the person must file a claim for refund and post a bond equal to one and a half times the total penalty assessed against him. IRC 6672 (c).

2. If the refund is denied or the IRS fails to act on the refund claim within a six month period, the person then has 30 days to initiate a refund suit in the United States District Court or the United States Court of Claims.

3. Since only issues raised in the claim for refund or in the appeal are subject to judicial review, it is critical that an attorney be involved in the preparation of those documents.

4. The statute of limitations for collection is suspended while the proceeding is in court.

5. It is important that these procedures be considered and followed because the tax is not dischargeable in bankruptcy. Rife v. United States, 809 F. 2d 425, 427 (7^th Cir. 1987); In re: Frye, 91 B.R. 69, 70 (Bankr. E.D. Ms. 1988).

G. How To Avoid the Trust Fund Penalty

1. A. Responsible Party Issues Before the IRS Appears

(a) If you're not actually going to have control over the decision as to who gets paid, do not allow yourself to be put as a signor on the business checking account or to sign payroll tax returns or other activities relating to the payroll tax.

(b) If you're involved in the bill paying process, submit a written list of the bills to be paid with a place to be initialed by the individual making the decision, so as to document who actually decided what bills were to be paid and when.

(c) If there are individuals working for your business that are being classified as independent contractors, you may want to revisit that issue. If these individuals are reclassified by the IRS, you may be personally liable for the taxes that were not withheld.

(d) Try to make it clear to employees and third parties that you do not have the final decision over who gets paid. Do not let your ego get in the way of avoiding potential liability.

2. Responsible Party Issues After the IRS Appears

(a) Try to establish that you were not a responsible person at the time that the taxes were withheld; for example you had already left the employment or your position in the company had changed.

(b) Establish that you did not have the authority to act. See, for example United States v. Stanton, 87 AFTR 2d Para 76-1427 (S.D. Fla. 1976). The corporation's vice president was only a foreman and had no control or participation in business or financial decisions.

(c) Part of the agent's activities will be the interview of officers, employees and, possibly, even creditors of the corporation. These individuals should be identified and affidavits obtained from them, to the extent that they will support your position, that you are not a responsible person, or that you had no knowledge.

(d) Other things to consider are minutes of the meetings of the board of directors and shareholders relating to authority and duties of officers and directors, payment of taxes, creditors and so forth.

(e) Please note that, if you are under consideration as a responsible party, the Service conducts a full compliance check. Accordingly, if you've not filed your other returns, hang on to your seat, because they will be coming after you for that as well.

3. Potential Defenses as to Willfulness

(a) Try to establish that your actions were simply negligent and not knowing or intentional.

(b) Try to establish that there were no funds or no unencumbered funds available to pay the taxes at the time that the responsible person first became aware of the non-payment of taxes.

(c) Depending on where you live, try to establish a reasonable cause defense. While this has not been officially recognized by many circuits, some circuits have recognized it in theory, although, few have applied it in reality.

(d) Misclassification of workers as independent contractors- if you can establish that you honestly believed that they were properly classified, this could establish a lack of willfulness. Kraut Management Services v. United States, 889 F. Supp. 1313 (D. Ore.1995).

4. Dealing with the Agent

(a) The agent will try to interview you in person. Internal Revenue Manual 5.7.4.2.1. If at all possible, try to avoid being interviewed by the agent. If this is not possible, do a mock interview before going before the agent.

(b) One of the most critical documents that will be involved in an investigation is Form-4180, "Report of Interview with Individual Relative to Trust Fund Recovery Penalty.

(1) This form is a series of questions that are asked during the revenue officer's interview. The responses are written down by the revenue officer and then the individual is asked to sign the form at the completion of the interview.

(2) It is absolutely critical that you obtain a copy of this form, review it in detail and consult with a tax professional concerning your responses. Each of these questions is designed to establish your liability and a failure to carefully consider your responses could result in an assessment of the trust fund penalty.

(3) The author has been involved in cases where the tentatively responsible person, prior to obtaining proper representation, signed a Form 4180 which contained an incorrect statement because of his lack of understanding of the question. Later, during an appeal, the appeals officer went back to the original statements contained in the Form 4180 and pointed to it as being more credible since it was given earlier in the process. As a result, the taxpayer lost his case.

5. Calculate the Statute of Limitations

(a) It is possible that some of them may have run, or are about to run.

(b) This may impact various tactical decisions throughout the process.

6. If any payments are to be made by the business, try to have them designated as

payments to be applied against the trust fund portion of the assessment.

(a) This may be difficult, but, the effort should always be made.

(b) Otherwise the Service will apply it to the best interests of the Service and will apply it to the non-trust fund portion of the tax liability and other penalties and interests being assessed on that non-trust fund liability.

7. Always protest the proposed assessment.

(a) Even if you can't get completely out of the assessment, you may be able to reduce theamount based on the computation of the tax or prevent an assessment for some of the periods.

(b) In doing so, try to secure a copy of the file, including the trust fund computation sheets. The items requested should include Form 4180, Form 4183 (interview of the employer) and any documentary evidence gathered by the Service. If the IRS won't voluntarily give them to you, consider a Freedom of Information and Privacy Act request.

8. Try to establish that someone else is the responsible person.

(a) This is particularly valuable if you can demonstrate that that individual has significant assets with which to pay the liability, or, sometimes even better, that he has removed assets from the business that could have been used to pay the liability.

(b) While there can be more than one responsible party, if the "more responsible party" has significant assets, the Service may pursue him to the exclusion of others. The Service is known to "follow the money".

9. If your financial circumstances will support it, establish that you do not have the ability to pay the tax even if the Service were to assess you. The Service will not normally assert the penalty against an individual who has no ability to pay. Internal Revenue Manual 5.7.5.1.

10. Ultimately, if you are assessed, remember that you have a right to contribution from the other responsible parties.

(a) You are entitled to request that the IRS disclose to you the name of any other person determined to be liable under §6672.

(b) The IRS must also disclose what steps it has taken to collect from that person and the nature of the collection actions taken and the amounts, if any, received. IRC §6103 (e) 9.

IV. The How - Part Three - Criminal Offences Relating to Payroll Taxes

A. Section 7202, prohibits the willful failure to collect or pay over tax.

1. Failure to collect tax prosecutions are rare since few employers fail to

collect the tax.

2. Failure to account for and pay over the tax consists of 4 elements:

(a) A duty to collect, account for, or pay over a tax.

(b) A failure to truthfully account for the tax.

(d) Willfulness.

3. Historically, proof of willfulness is difficult in a 7202 prosecution, where

the employer has used the funds for other business purposes. Accordingly,

most cases were prosecuted under 7215, a misdemeanor provision.

4. This may be changing as more 7202 cases are being prosecuted.

B. Section 7215 prohibits a violation of 7512(b)

1. Violation of 7215 is a misdemeanor.

2. Willfulness is not an element of Section 7215. It is a strict liability statute.

3. Under 7215, if the Service has given notice, under Section 7512, to deposit

withheld taxes in a separate trust account payable to the United States, and

the taxpayer fails to do so, the taxpayer is guilty of a misdemeanor

C. Section 7203 prohibits willful failure to file, or willful failure to pay tax

D. Section 7204 prohibits furnishing a fraudulent statement or failing to furnish a withholding statement to an employee.

1. Section 7204 is a misdemeanor offense for willfully furnishing an employee

with a false or fraudulent statement or willfully failing to provide him with a

statement as required under Section 6051 and Regulations adopted thereunder.

2. The elements are:

(a) A legal duty under Section 6051 to furnish a statement

(b) Furnishing a false or fraudulent statement and

3. The elements under the failing to furnish a statement are:

(a) Legal duty under Section 6051 or regulations thereunder to furnish a statement in a manner, at a certain time, and showing certain information.

(b) Failure to furnish such a statement and

E. Other Potential Criminal Offenses, include Section 7207, providing a false document; Section 7212, corruptly interfering with the administration of the tax laws. Both are felonies.

Florida Institute on Federal Taxation Conference 2010

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