A recent Tax Court case found a taxpayer liable for a trust fund recovery penalty over the unpaid employment taxes of a partnership of which he was no longer a partner.

The trust fund recovery penalty was instituted to encourage the prompt payment of withheld income and employment taxes. The penalty—known by its acronym as the TFRP—may be assessed against any person who is responsible for collecting or paying the withheld taxes and willfully fails to collect or pay them. 

Responsible persons can be an array of people, including partners, members or employees of a partnership. Being labeled a “responsible person” for purposes of the TFRP can be an unfortunate occurrence for the person, since it means that one is liable for the entire amount of the unpaid tax. Of course, the responsible person to whom the IRS applies the penalty can seek proportionate reimbursement from any other responsible persons.

In a recent Tax Court case, the IRS sent Olin Smith, a former partner of Vito’s South Limited Partnership, a Letter 1153, Trust Funds Recovery Penalty Letter, on Oct. 20, 2010, advising him of proposed penalties against him for failing to collect and pay over the employment taxes of employees of Vito’s South Limited Partnership for the first three quarters of 2009. The letter advised Smith that he had 60 days to mail a written appeal to the IRS.

Smith faxed a copy of the Letter 1153 to his CPA, Douglas Dickey, who prepared and signed a letter addressed to the IRS’s Houston office, as directed by the Letter 1153. The letter from the CPA requested a conference, and asserted that Smith had withdrawn as a partner of Vito’s South Limited Partnership as of Jan. 1, 2008, and therefore should not be held liable for the payroll taxes incurred after his withdrawal.

The IRS assessed the penalties against Smith, refusing to consider Smith’s arguments that he should not be liable for the penalties since, the court found, he had already been afforded an opportunity to dispute the liabilities.

Smith agreed that if the Tax Court, pursuant to a partial trial, concluded that he received a prior opportunity to dispute the underlying trust-fund-recovery penalty liabilities, the IRS notice of determination should be upheld. The court concluded that Smith had been afforded such an opportunity, and sustained the notice of determination.

Since Smith could not prove that the letter from his CPA was ever mailed, the court found that it was never sent to the IRS in late 2010, and therefore Smith failed to take the opportunity to contest the liability.

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