In order for a person to be held liable for a company’s failure to “collect and pay over tax” pursuant to § 6672 of the Internal Revenue Code, that person must be found to be a “responsible person” and to have acted “willfully”. In order to reach the issue of willfulness, the person in question must first be found to be a “responsible person”. These criteria each have several factors, and are determined by a facts and circumstances test in each case.
“Responsible Person”
“A responsible person under § 6672 has ‘the status, duty and authority to avoid the corporation’s default in the collection or payment of the taxes.’ To trigger § 6672 liability, a person must have significant decision making authority over the corporation’s tax matters. A person’s technical authority to sign checks and duty to prepare tax returns are not enough to make the person responsible under the statute.” Barton v. United States, 988 F.2d 58, 59 (1993)
Persons having been found as the “responsible person” pursuant to § 6672 include: (1) the number one man in the company who had assumed full charge of financial operations of the company and operated as Secretary and Treasurer thereof (Kubinski v. United States, 285 F. Supp. 849, 850 (1968)), (2) an officer who had hiring and firing authority, check signing authority, the ability to manage and direct employees, authority to sign corporate tax returns, and direct payments of the company’s debt’s (Farkas v. United States, 57 Fed.CL. 134, 141-42, (2003)), and (3) a 50% shareholder in a plumbing company, who conducted the day-to-day operation of the business, hired and fired employees, ordered supplies, set the price of jobs, disbursed corporate funds for the payment of supplier’s bills and business expenses, and deposited receipts in the corporation’s bank accounts (White v. United States, 372 F.2d 513, 515 (1967)); but excluded (1) an officer who was not responsible for handling the financial affairs of the company, did not prepare, maintain, or have access to any of the corporate books, records or checkbooks, did not prepare or sign any corporate tax returns, and did not handle any creditors’ bills or inquiries nor negotiate with any creditor (United States v. Carrigan, 31 F.3d 130, 133 (1994)), (2) the company’s second in command, who had authority to sign tax returns, sign checks for small purchases, whose rubber stamp signature appeared on payroll checks, and who knew that the company had not met earlier tax obligations, but where the company President acknowledged full control of all corporate funds and sole responsibility for paying taxes (Barton, supra at 59), and (3) Chairman of the Board of Directors who participated in electing officers, hiring top level consultants, delegated authority to establish bank accounts, designated signatories, authorized borrowing by officers, major sales programs, and played an instrumental part of negotiating a recapitalization agreement with a potential investor (Godfrey v. United States, 748 F.2d 1568, 1571 (1984)).
“Willfulness”
A “responsible person”, “‘act[s] willfully if [they] pay other creditors in preference to the IRS knowing that taxes are due.’ A responsible personal also acts willfully if [they] demonstrate reckless disregard for whether taxes have been paid. The ‘reckless disregard’ standard is met if the taxpayer ‘(1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid and if (3) [they were] in a position to find out for certain very easily.’” United States v. Carrigan, 31 F.3d 130, 133 (1994) In addition, “there need be showing of ‘personal fault;’ a ‘voluntary, intentional and conscious decision not to collect and remit taxes thought to be owing.’” (Farkas, supra at 142) Moreover, willful actions are defined as, “a deliberate choice voluntarily, consciously and intentionally made to pay other creditors instead of paying the Government, and that it is not necessary that there be present an intent to defraud or to deprive the United States of the taxes due, nor need bad motives or wicked design be proved in order to constitute willfulness.” (White, supra at 521)
Tax courts have found willful actions of “responsible persons” where (1) a company officer had actual knowledge of taxes due and owing, and subsequently took steps to increase his salary, and directed payments of creditors other than the government (Farkas, supra at 144), and (2) where a company officer directed as to which creditors should be paid and when (Kubinski, supra at 850); but excluded (1) a situation where a company officer had actual knowledge of past due taxes, and allowed his signature to appear on company payroll checks, when the personal was not first found to be a “responsible person” pursuant to § 6672 (Barton, supra at 60), and (2) a Chairman of the Board of Directors, who, after learning about a past due payroll taxes and a demand for the payment of current payroll taxes in full, took action to direct an investigation and payment of the payroll taxes. (Godfrey, supra at 1577). In furthering this line of thinking, the court stated that, “[t]he case law requires, however, at least actual notice of the current delinquency to establish an affirmative duty to act.” (Id.at 1578)