Ask The California Employment Tax And Payroll Tax Attorney – Exposure To The Trust Fund Recovery Penalty – The Impact Of Bank Records – The Powell Case

By Robert S. Schriebman

2024

Introduction

In all my years of practice I can say without hesitation that the saddest matters I have handled involve the IRS’ assessment of the Trust Fund Recovery Penalty (TFRP) against young people. Young people are especially vulnerable to unscrupulous employers who misappropriate federal and state payroll taxes to the employers’ personal advantage. They hire young people, give them high-sounding titles, and leave them exposed to personal liability for misappropriated payroll taxes. These young executives are put on bank signature cards and given check-signing authorizations. They often sign company checks at the owner’s direction and when the owner is otherwise not available.

Enter the Revenue Officer

 When the IRS Revenue Officer (RO) is assigned the tax deficiency, that RO conducts an investigation. One of the first things the RO looks for is control over the business funds. The investigation always involves a summons to the bank to obtain copies of bank signature cards and other proof of who has the authority to sign checks. To the RO, check signing authority and the actual signing of business checks proves conclusively who should be the target of the TFRP.

The Finger-Pointing Contest

 IRS investigations almost always result in a finger-pointing contest. The company president points the finger of quilt at the controller who in turn points his/her finger at the underling who signed checks and made other business decisions at the controller’s direction. The typical RO does not bother to conduct a thorough fact-finding examination. Rather, the RO does a “shotgun” approach and assesses everyone in sight.

Such was the case of Richard W. Powell, Jr. Richard’s case was no exception. Richard’s name and signature were on the bank records. This article will discuss the impact of bank records, standing alone, on the impact of TFRP assessment.

The Case of Richard W. Powell

Richard W. Powell, Jr. v. Internal Revenue Service, (US District Court, W.D. Pennsylvania, March 29, 2024)

Michael Pavlock owned and operated Michael’s Automotive Services (MAS). He was not a nice guy. He hired Richard as an errand boy. Richard was not a shareholder; he was not an officer; and he was not a director. However, Michael put him on the bank account. The bank had Richard’s signature card and other authorizations that allowed Richard to sign checks. Richard was also given a job title as General Manager. Richard also signed checks occasionally but only at Michael’s direction. In the meantime, Michael took close to $450,000 from the company between 2005 to 2007 and did not pay payroll taxes.

An IRS RO conducted the usual investigation. When the RO questioned Michael, he pointed his finger directly at poor Richard. The RO found Richard’s signature and authorization on the bank records and that was good enough to assess Richard the TFRP. Richard filed claims for refund for each period of the assessment and brought suit in the US District Court.

Responsibility and Willfulness

IRC § 6672 is the governing statute for the TFRP. The statute requires that two elements must be met before a proper assessment can be made: responsibility and willfulness. A responsible person need not have exclusive control over the company’s finances, he/she need only have significant control. A person has significant control if he has the final or significant word over which bills or creditors get paid. Clearly Michael fit the bill.

The Court found that merely having your name and signature on bank records is not, standing alone, dispositive. Richard could only sign checks at Michael’s direction and only Michael had the final word on which bills or creditors got paid. Richard did not have significant control over these decisions. Richard was not a responsible person for TFRP assessment purposes.

What about willfulness? A responsible person acts willfully when he/she knows or acts in a reckless disregard of the fact that payroll taxes are due. Richard was only an errand boy. His job duties were akin to those of one carrying out everyday tasks per Michael’s direction. Richard did not act willfully.

Conclusion

The Court found that it was shameful how Michel pointed the finger of quilt at a simple errand boy who had no control over daily fiscal affairs. It also helped Richard’s cause that the bookkeeper as well as fellow workers came to his aid and testified how Michael ran the business. Bank signature records, and even a few signed checks, do not make a proper TFRP assessment.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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