TRUST FUND PENALTY IS PENALTY NOT TAX

Trust fund penalty is penalty not tax. In our ongoing coverage of pertinent Tax Court cases, we cover David J. Chadwick v. Commissioner of Internal Revenue. The Tax Court has determined that a Trust Fund Recovery Penalty is a “Penalty” not a “Tax” as the IRS had argued. Thus, the TFRP is subject to the requirement under Code Sec. 6751(b)(1) that written supervisory approval be secured for the initial determination of the assessment of the penalty. The Tax Court stated that it had not previously resolved this question. Trust fund penalty is penalty not tax.

THe taxpayer was the sole member of two limited liability companies (LLCs) each of which failed to pay employment taxes on employee wages. The revenue officers assigned to investigate the delinquencies concluded that the taxpayer was a “responsible person” of each LLC and was this required to collect and pay over its employment taxes. Each RO completed a Form 4183, Recommendations re:Trust Fund Recovery Penalty Assessment, recommending that TFRPs be assessed against the taxpayer. Each RO’s supervisor approved the recommendation in writing on the Form 4183. On the same days as the Form 4183 were signed, the IRS issued Letters 1153, Trust Fund Recovery Penalty Letter, notifying the taxpayer of the IRS’s determination to assess TFRP’s and offering that taxpayer the opportunity to appeal those determinations. The taxpayer did not appeal, and the IRS assessed the TFRP’s.  The IRS mailed the taxpayer a levy notice in an effort to collect the unpaid TFRP liabilities. The taxpayer timely requested a collection due process hearing, at which the taxpayer requested that his account be placed in Currently Not Collectible status.

The case was assigned to a settlement officer in the IRS Appeals Office in Riverside, California. After reviewing IRS records the SO ascertained that petitioner had not filed personal income tax returns for 2015-2017. Eventually the IRS asked for the returns, which were not forwarded, and issued a levy.