The recent Sixth Circuit decision in Bibler v. U.S., 2018 WL 1911249, may mark an evolution of the definition of “willfulness” in trust fund recovery penalty cases.
For the Internal Revenue Service (IRS) to prevail in its assessment of the trust fund recovery penalty pursuant to Internal Revenue Code (I.R.C.) § 6672, the liable taxpayer must be both responsible and willful. The IRS’s guidance regarding the assessment of the trust fund recovery penalty can be found here.
Responsibility is generally defined as being responsible for collecting, accounting for, and paying over payroll taxes. In determining who is responsible, the courts will review a number of factors, including the following:
1. The duties of the officer as outlined in the corporate by-laws.
2. The ability of the individual to sign checks.
3. The identity of the officers, directors, and shareholders.
4. The identity of the individuals who hired and fired employees.
5. The identity of the individuals who were in control of the financial affairs of the corporation.
None of the above factors are dispositive. The court will review all the elements of the case in determining whether an individual is responsible.
Willfulness is generally defined as a responsible individual that has either actual knowledge that the trust taxes were not paid or recklessly disregarded the known risks that the trust fund taxes were not paid. Recklessness is generally defined as a disregard for obvious or known risks that the trust taxes are not being paid and a failure to investigate that fact.
The actual knowledge element of the willfulness standard was not an element that was highly litigated on its face. Most disputes relating to willfulness centered around factual disputes and not legal challenges. However, the Second Circuit expanded the actual knowledge definition to include a reasonable cause defense, in spite of fact that there is no specific reasonable cause exception in I.R.C. § 6672. In the Bibler decision, the Sixth Circuit held that, even though I.R.C. § 6672 does not have a reasonable cause exception, the Second Circuit’s “reasonable cause” defense should apply to the “willfulness” element.
The “reasonable cause” defense holds that a responsible person is not willful if that person believed that the taxes were being paid, so long as that belief was, in the circumstances, a reasonable one. Establishing that reasonable belief can be a difficult hurdle to overcome, but in certain situations, this can be a useful defense to the IRS’s assessment of the trust fund recovery penalty.