Person Penalty: A Look at the Elements
Mark A. Segal
Over the past decade, substantial conflict
has arisen between taxpayers and the IRS over the application
of IRC section 6672(a), sometimes called the “100%
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
to a penalty equal to the total amount of the tax evaded,
or not collected, or not accounted for and paid over.
The IRC section 6672 penalty is assessed
and collected in the same manner as the tax on which it
is levied. The purpose of the penalty is to promote compliance
with the duty to withhold and remit taxes from an employee’s
paycheck. Thus, the IRS’s main target for collection
of nonremitted sums is the person “responsible”
for collection and remission.
Application of section 6672 necessitates
ascertaining what constitutes a “responsible person”—because
the penalty can apply only to responsible persons—and
what constitutes willful failure to collect and remit, or
failure to truthfully account.
A Question of Defense
The courts have broadly interpreted “responsible
person” as those persons that possess either the actual
authority or the capability of paying the tax. In addition,
the expression has been construed to include persons that
hold corporate office, maintain control over corporate finances,
have substantial ownership interest in the entity, and have
the authority to hire or fire.
As expressed in Denbo v. United States
[98 F.2d 1029 (10th Cir. 1993)], check-writing authority
is not a necessary condition, so long as one has significant
authority (effective control) over corporate finances. In
many instances, more than one person can be considered a
For purposes of Section 6672, “willfulness”
has encompassed “voluntary, conscious and intentional
preference of other creditors over the government claims.”
The expression also includes the failure to satisfy a duty
to investigate or to correct faulty management upon being
notified of failure to meet payroll obligations. Certain
courts have indicated that reckless disregard or gross negligence
may satisfy the willfulness criteria.
In Thomas Metzger [No. 00-76820CIV-LENARD
(U.S.D.Ct. S. Dist. of Florida, 2002)], the District Court,
in remanding a case to the Bankruptcy Court, indicated that
the burden of proof for avoiding assessed section 6672 penalties
falls upon the taxpayer to establish that the taxpayer is
not a responsible person or did not act willfully. The government
is presumed to be correct in its assessment, and such presumption
has been adopted by a majority of the circuit courts that
have addressed the issue.
The Bankruptcy Court typically becomes involved
when a taxpayer files for bankruptcy and one of the claims
for relief concerns an alleged IRC section 6672 penalty.
Included among recent bankruptcy cases are: In re Ronald
D. Nutt, et al. (88 AFTR2d 2001-5235) aff’d No.
6:02CV1346 (U.S.D. Ct. Mid. Dist., FL, 2003, United
States v. Thomas J. Metzger, et ux. (No. 00-7682-CIV-LENARD),
and In re Macagnone [85 AFTR2d Par. 2000-452 (2000)].
In each of these cases, the court ruled in favor of the
taxpayer (although Metzger was overturned on appeal).
The cases are instructive about possible arguments on behalf
of the taxpayer.
In Nutt, the taxpayer asserted
that he was not subject to the Section 6672 penalty because
the failure to withhold was not willful. The case concerned
a company formed by Nutt in 1975 in which he possessed “exclusive
and direct management” until mid-1993, at which time
another person was appointed to serve as president. Nutt
returned to the position of president in May 1995. Payroll
taxes were not paid until the end of 1995, after his return
to the position of authority. During this period, Nutt did
not sign payroll checks, 941 returns, or direct payments
to be made to other creditors, nor did he participate in
daily accounting, management, or operations. These duties
were overseen by others.
Nutt was allegedly informed of the payroll
tax problem in August 1995 through a memorandum, which he
did not recall. An IRS revenue officer subsequently visited
the company on October 31, 1995. Upon learning of this visit,
Nutt made a personal loan to the company to pay the first
quarter payroll taxes, because the company lacked adequate
resources of its own.
Based on these facts, the court held that
Nutt had not acted willfully and, therefore, was not subject
to the IRC section 6672 penalty:
The burden of proof to show a lack of willfulness was
upon Nutt, because Nutt stipulated that he was a responsible
Prior case law defined willfulness as being a “voluntary,
conscious, and intentional act.”
Demonstrating a lack of willfulness requires an affirmative
demonstration that no other creditors received preference
over the IRS.
lack of willfulness may be proven affirmatively if the
person “did not disregard his duties, and that he
undertook all reasonable efforts to see that such taxes
would be paid in circumstances where the employer had
the means of payment and could be reasonably expected
to make such payment.” Merely establishing that
taxes were owed and not immediately paid is not sufficient
evidence of willfulness.
The facts revealed that during the period of 1975–1993—when
Nutt was in control of the entity—payroll tax obligations
were satisfied on a timely basis. Evidence also showed
that Nutt acted promptly upon becoming aware of the problem.
Nutt paid some of the liability with his own resources.
Earlier, based on representations made to him, Nutt thought
the finances of the company to be stable, and had no reason
to believe there was a problem. Because Nutt did not allow
the situation to fester or prefer other creditors over
the IRS upon notice, it appears that he acted in good
faith and did not willfully avoid the taxes.
Identifying reckless disregard and whether
it is adequate grounds for willfulness is an issue of some
concern. Case law suggests that reckless disregard may satisfy
the willfulness criteria. In Smith v. United States
[894 F.2d 1549 (11th Cir. 1990)], as in Nutt, the defendant
was established as a responsible person. The burden of proof
then lay on the defendant to show that he had not acted
willfully in failing to meet payroll tax obligations. In
Smith, liability under IRC section 6672 was found;
the person was considered to have acted with reckless disregard
not only because he paid employees after learning of the
payroll tax delinquency, but also because he ignored the
company comptroller’s advice to look into the financial
In a similar manner, in Malloy v. United
States [17 F.3d 329 (11th Cir., 1994)], the Eleventh
Circuit Court of Appeals noted, “We hold that a responsible
person is liable under section 6672 if he or she either
had actual knowledge that taxes were not being paid or acted
with a reckless disregard of a known or obvious risk of
nonpayment.” In Malloy, the responsible person
never asked if the taxes were paid or took notice of the
obvious risk of nonpayment. In Wright v. United States
[809 F.2d 425 (7th Cir. 1984)], the court indicated that
gross negligence could be considered to meet the willfulness
Macagnone was a Chapter 7 bankruptcy
case concerned with whether the court should discharge an
IRS claim of the IRC section 6672 penalty. Examination of
the facts resulted in the court finding Macagnone to be
a responsible person, based upon his being a 50% shareholder,
a principal in the corporation, technically authorized to
disburse funds, and authorized to hire and fire employees.
The court found willfulness to be lacking.
Citing the Eleventh Circuit decision In
re Haas [48 F.3d 1153 (1995)], the Bankruptcy Court
noted that “a debtor’s knowing failure without
more, did not constitute a willful attempt in any manner
to evade or defeat such tax.” In Macagnone,
the taxpayer took corporate funds for personal use; although
he did not take compensation during the period in question,
he took sums to satisfy personal and business expenses.
Likening the case to Haas, the court opined that
although the priorities of the taxpayer may have been wrong,
they did not rise to the level of willfulness. On appeal
[86 AFTR2d Par. 2000-5076 (U.S. D.Ct., M.D., Fla., 2000)],
the District Court affirmed the Bankruptcy Court’s
decision. According to the court, the facts had not shown
that the taxpayer had engaged in a conscious, knowing, and
voluntary failure to pay. The ruling noted that the statute
provides for neither gross negligence nor reckless disregard
as grounds for satisfaction of the willfulness test.
Burden of Proof
In Metzger, the U.S. District Court
for the Southern District of Florida remanded an IRC section
6672 case to the Bankruptcy Court, which had earlier ruled
in the taxpayer’s favor. The District Court disagreed
with the Bankruptcy Court over the initial burden of proof.
The Bankruptcy Court’s position had been that the
government bears the initial burden of proof concerning
whether the taxpayer is a responsible person. Upon such
burden being carried, the burden of proof shifts to the
taxpayer to establish that the taxpayer had not acted willfully.
The Bankruptcy Court’s position was premised upon
the following language: “Once it is established that
a taxpayer is a responsible person, the burden of proving
lack of willfulness is on the taxpayer.” [See Mazo
v. United States, 591 F.2d 1151 (5th Cir. 1979), and
Thibodeau, 828 F.2d 1499 (11th Cir., 1987).]
In remanding, the District Court noted that
the Eleventh Circuit had not actually placed the burden
on the government to establish that the taxpayer is a “responsible
person.” In the eyes of the District Court, the burden
concerning whether the taxpayer constitutes a responsible
person falls on the taxpayer. Liddon [448 F.2d
509 (5th Cir. 1971), cert. denied, 406 U.S. 918 (1972)]
indicated that once an assessment of an IRC section 6672
penalty is made, the taxpayer bears the burden of establishing
that she either is not a responsible person or did not act
IRC section 6672 contains one of the most
severe penalties set forth in the Internal Revenue Code.
The penalty serves as a major deterrent for taxpayers that
fail to comply with their duty to withhold and submit payroll-related
taxes. Planning accordingly and being aware of the parameters
of a “responsible person” and a “willful”
act may help avert subjection to audit and penalty.
Mark A. Segal,
LLM, CPA, is a professor of accounting at the University
of South Alabama, Mobile, Ala.
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