Eleventh Circuit Allows Injunctive Relief for IRS to Collect Unpaid Employment Taxes

(Parker Tax Publishing June 2019)

The Eleventh Circuit vacated a district court's order denying the IRS injunctive relief that would require a business and its owners, who habitually failed to pay federal employment taxes, to take specific steps to ensure payment of the withheld taxes to the IRS. The Eleventh Circuit found that the district court erroneously concluded that the availability to the IRS of an action for damages was an adequate remedy at law and that that the IRS therefore could not show irreparable harm, and the Eleventh Circuit remanded for the district court to consider the collectability of a future money judgment in determining whether that remedy was adequate. U.S. v. Askins and Miller Orthopaedics, P.A., 2019 PTC 201 (11th Cir. 2019).

Background

Askins and Miller Orthopaedics, P.A. (Askins), is a Florida medical practice run by brothers Philip and Roland Askins. Since 2010, Askins repeatedly failed to pay employment taxes to the IRS as required under the Federal Insurance Contributions Act (FICA). Askins did not dispute its tax liability. It filed returns documenting the liability but repeatedly failed to pay. IRS representatives spoke with the Askins brothers at least 34 times beginning in December 2010, including 27 in-person meetings. Twice the brothers entered into installment agreements to bring the company back into compliance, but they defaulted both times. Two other times, the IRS warned Askins that continued noncompliance could prompt the government to seek an injunction.

The IRS also served levies on approximately two dozen entities, but most responded that there were no funds available. Three entities paid some money, but not nearly enough to satisfy Askins's debts or keep pace with its accrual of new liabilities. Additionally, the IRS's collection efforts were hampered by the Askins brothers' attempts to hide funds and keep account balances low. Between 2014 and 2016, the brothers transferred money to a trust and to a business associated with their father. They also opened additional bank accounts. The IRS did not seek to levy these entities or accounts. By then, the case had been referred to the Department of Justice and the IRS believed that there was a substantial risk that any new levy would result in the brothers opening new undisclosed accounts and moving the money to those accounts.

The IRS also sought to recover from the Askins brothers personally by issuing levies to entities associated with them. However, most of these entities made no payments, and the payments that were made were not enough to keep pace with the continuously accruing liabilities. The IRS did not believe the brothers had enough assets in their own names to cover the debts, and even if they did, the trust fund recovery penalties could not be used to cover the company's share of its own employment taxes (as distinct from employees' taxes that were withheld from their paychecks). The IRS also filed notices of federal tax liens, but Askins did not own any substantial property.

Feeling as if it had reached the end of its rope, the IRS sued Askins and both brothers in 2017. It asserted two counts: one for permanent injunctive relief requiring Askins and the brothers to take specific steps to ensure that future payments would be made before the brothers could divert the money, and another for damages to account for the outstanding liabilities. The IRS also asked the district court to issue a preliminary injunctionlargely mirroring the permanent injunction it sought in its complaintdesigned to prevent Askins from incurring further tax liabilities while the litigation was still ongoing. The district court denied the injunction because it concluded that the availability of an action for damages was an adequate remedy at law and that the IRS therefore could not show irreparable harm. The district court also suggested that the injunction was a disfavored obey-the-law injunction. The IRS appealed to the Eleventh Circuit.

Code Sec. 7402(a) allows a district court to grant injunctive relief to enforce federal tax laws. To obtain a preliminary injunction, the IRS must demonstrate that (1) there is a substantial likelihood of success on the merits, (2) the IRS will suffer irreparable injury unless the injunction is issued, (3) the threatened injury to the IRS outweighs whatever harm the proposed injunction might cause the defendants, and (4) the injunction would not be adverse to the public interest. Under Rule 65(d) of the Federal Rules of Civil Procedure, injunctions must state their terms specifically and describe in reasonable detail the act or acts restrained or required.

Eleventh Circuit's Analysis

The Eleventh Circuit vacated the district court's order denying injunctive relief and remanded for the district court to consider the collectability of a future money judgment in determining whether that remedy would be adequate. The Eleventh Circuit said that the district court applied a categorical rule that a case involving money damages can never warrant injunctive relief, regardless of the ability to collect on a future judgment, and found that this rule went against the history and purposes of equitable relief.

According to the Eleventh Circuit, the fact that the IRS was attempting to avoid future losses was key. As an involuntary creditor, the IRS would continue to lose money as long as Askins continued to accrue employment taxes, and unlike other creditors, the IRS cannot cut its losses by refusing to extend additional credit. Given the considerable resources the IRS expended to attempt to collect the unpaid taxes and the fact that Askins was effectively judgment proof, the court determined that injunctive relief was appropriate under Code Sec. 7402(a). Absent the requested injunction, the court said, the government would continue to suffer harm, including lost revenue and the expenditure of a disproportionate amount of its resources monitoring Askins and attempting to bring it into compliance.

The Eleventh Circuit also found that the IRS's proposed injunction was not an obey-the-law injunction in violation of Rule 65(d). The court noted that the proposed injunction listed numerous concrete actions for Askins to take, including segregating funds, informing the IRS of any new business ventures, and filing various periodic affidavits.

For a discussion of a district court's power to issue injunctions, see Parker Tax ¶262,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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