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Trust Fund Recovery Penalties Are Subject to Written Supervisory Approval Requirement

(Parker Tax Publishing February 2020)

The trust fund recovery penalty (TFRP) is a penalty within the meaning of Code Sec. 6751(b)(1) and is thus subject to the requirement that written supervisory approval be secured for the initial determination of assessment of such a penalty against a taxpayer. In the instant case, the IRS satisfied the requirements of Code Sec. 6751(b)(1) because written supervisory approval of the TFRPs assessed against a taxpayer who failed to pay employment taxes was secured on two Forms 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, recommending assertions of the TFRPs against the taxpayer on the same date two respective Letters 1153, Trust Fund Recovery Penalty Letter, were mailed to the taxpayer. Chadwick v. Comm'r, 154 T.C. No. 5 (2020).

David Chadwick was the sole member of Integrated Communications Network, LLC (ICN), and Netcast BPO Staffing, LLC (Netcast). Each of the two limited liability companies (LLCs) failed to pay employment taxes with respect to its employees' wages. Different IRS revenue officers (ROs) were assigned to investigate these matters. The ROs concluded that Chadwick was, under Code Sec. 6672(a), a "responsible person" of each LLC and was thus required to collect and pay over its employment taxes.

Each RO completed a Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, recommending that trust fund recovery penalties (TFRPs) be assessed against Chadwick. Each RO's supervisor approved the recommendation in writing on the Form 4183. On the same days as the Forms 4183 were signed, the IRS issued Letters 1153, Trust Fund Recovery Penalty Letter, notifying Chadwick of the IRS's determinations to assess TFRPs and offering Chadwick the opportunity to appeal those determinations. Chadwick did not appeal, and the IRS assessed the TFRPs.

The IRS mailed a levy notice in an effort to collect the unpaid TFRP liabilities, and Chadwick timely requested a collection due process hearing (CDP). The case was assigned to a settlement officer (SO) in the IRS Appeals Office. After reviewing IRS records, the SO ascertained that Chadwick had not filed personal income tax returns for 2015-2017. The SO sent Chadwick a letter scheduling an in-person CDP hearing for May 8, 2018, and informing him that, in order for the SO to consider collection alternatives, Chadwick needed to provide tax returns for 2015-2017 along with numerous other pieces of financial information. The SO asked that Chadwick submit these documents before the hearing. On May 4, 2018, the SO reviewed the administrative file and verified that the TFRPs at issue had been properly assessed, that notice and demand for payment had been mailed to Chadwick at his last known address, and that there existed an employment tax balance due for each of the five quarters. Chadwick submitted no tax returns and no financial information before the hearing.

At the hearing, Chadwick's representative requested that Chadwick's account be placed into currently not collectible (CNC) status. The settlement officer replied that, in order for Chadwick's account to be considered for CNC status, Chadwick would need to file delinquent tax returns and submit the pertinent financial information. Chadwick did not submit delinquent tax returns and or any financial information. The IRS issued a notice of determination sustaining the levy, and Chadwick petitioned the Tax Court, which reviewed the SO's actions for abuse of discretion.

The Tax Court held that a TFRP is a "penalty" within the meaning of Code Sec. 6751(b)(1) and, as a result, it is subject to the requirement that written supervisory approval be secured for the initial determination of such assessment. The court found that the initial determination of each penalty assessment was embodied in the Letter 1153 formally communicating the IRS's definite decision to assert TFRPs against Chadwick. The IRS satisfied the requirements of Code Sec. 6751(b)(1), the court stated, because written supervisory approval of the TFRPs was secured on each Form 4183 on the same date the respective Letter 1153 was mailed to Chadwick. Finally, the court concluded that the SO did not abuse his discretion in declining to place Chadwick's account into CNC status.

For a discussion of the responsible person penalty for unpaid employment taxes, see Parker Tax ¶210,108. For a discussion of IRS procedural requirements that must be met before the IRS can assess a penalty, see Parker Tax ¶262,195.

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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