Former Partner Who Failed to Timely Contest Proposed Penalties Held Liable for Unpaid Payroll Taxes Incurred After He Left the Organization

In Smith v. Commissioner of Internal Revenue, the Internal Revenue Service issued a notice to a man advising him that it planned to issue proposed trust-fund recovery penalties against him for unremitted payroll taxes collected in 2009 by a company the man previously held a partnership interest in. The Internal Revenue Code requires employers in the United States to withhold Social Security, Medicare, and other taxes from an employee’s paycheck. Those taxes are typically referred to as “trust fund taxes.” Under the Code, an individual who willfully fails to remit an employer’s trust fund taxes to the IRS may be held personally responsible for the entire unpaid amount.

According to the man, his accountant prepared a letter requesting a conference with the IRS in order to discuss the proposed penalties in 2010. In addition, the letter apparently stated the man withdrew from his partnership role in the organization about one year before the tax liability was incurred and authorized his accountant to act on his behalf in the matter. Whether or not the IRS received the letter was unclear, and the accountant could not locate a certified mail receipt.

In 2012, the IRS formally assessed a trust-fund recovery penalty against the former partner. In response, the man’s accountant notified the IRS that the man was no longer a partner in the business and argued the penalties should be abated. The IRS then informed the man that he was prohibited from contesting the issue of his underlying liability because he failed to do so when he initially received the notice of a proposed penalty. As a result, the IRS upheld the proposed levy against the man. The IRS Office of Appeals agreed, and the man filed a petition against the Agency with the U.S. Tax Court.

In his petition, the man challenged the notice of determination issued against him. After examining the facts of the case, the court held that the former partner was previously afforded an opportunity to dispute his liability with regard to the trust-fund recovery penalties assessed against him and failed to do so. In addition, the court found that evidence related to the man’s alleged prior appeal was unsatisfactory. The Tax Court also stated the former partner’s later purported appeals were untimely.

Since the former partner was afforded an opportunity to dispute his trust fund tax liability in 2010 and failed to do so, the Tax Court sustained the IRS’s notice of determination and entered a decision in favor of the Agency.

Navigating the Internal Revenue Code on your own can be tough. Certified tax law specialist William Hartsock has more than 30 years of experience assisting San Diego clients with their payroll and other tax law issues. To discuss your situation with a knowledgeable tax attorney, do not hesitate to call Mr. Hartsock today at (858) 481-4844 or contact him through his website.

Additional Resources:

Smith v. Commissioner of Internal Revenue, 2015 TC Memo 60 – Tax Court 2015

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