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Ask The EDD Attorney – The “Tough-Rap” The IRS TFRP And EDD Equivalent

By Robert S. Schriebman
December 6, 2016


It used to be called the “100% Penalty.” Several years ago it was changed to the “Trust Fund Recovery Penalty” or TFRP. An IRS Appeals Officer came up with the term “tough rap.”
IRC §6672 and its EDD equivalent, CUIC § 1735, impose stiff penalties on responsible individuals within corporations or LLCs who get failing grades on payroll tax compliance.

The courts are not sympathetic to these so-called responsible individuals. I would like to share with you the recent case of McClendon v. U.S. US District Court, S.D. Texas November 17, 2016. 2016-2 U.S.T.C. Para 50,480.

In this article I will also discuss how you can lose your right to challenge the proposed assessment against you by not timely filing a Protest. You should also read Article number 234, “Can You Be Held Personally Liable For Your Corporation’s Taxes?”

The Sad Case of Dr. McClendon

Robert L. McClendon founded Family Practice Associates of Houston, a corporation, in 1979. In 1995 Family Practice hired Richard Stephen Jr. as its Chief Financial Officer. By 2009 Family Practice owed over $10 million in unpaid IRS payroll and withholding taxes. Stephen pleaded guilty to 3 counts of felony theft of money that he embezzled. To pay the staff Dr. McClendon made a $100,000 personal loan to Family Practice in May 2009.

The IRS came after McClendon for over $4.3 million under the TFRP statute, IRC § 6672. In order to hold McClendon personally liable for all this money, the IRS had to prove two things: that McClendon was a responsible person and that his actions were willful. McClendon admitted that he was indeed a responsible person, but he argued that he was not willful because of Stephen’s embezzlement.

The Chief Judge of the U.S. District Court in Houston heard the case. Judge Rosenthal only had to decide whether McClendon’s conduct was willful because McClendon admitted he was responsible.

Judge Rosenthal’s decision parroted back all the right rules of law. You can learn these rules by reading the case. With regard to willfulness, Judge Rosenthal stated that under IRC § 6672 all that is required is for the IRS to show a voluntary, conscious and intentional act, not a bad motive or evil intent. If the responsible person pays other creditors ahead of the IRS, that is enough to show willfulness. In other words, if you pay the rent, utilities, and suppliers, ahead of the IRS, you have willfully violated TFRP. What about paying wages that are due and owing?

In the McClendon case, Dr. McClendon loaned Family Practice $100,000 from his personal funds so that the employees would receive their paychecks. Admittedly, Dr. McClendon knew, at that time, that Family Practice owed the IRS over $10 million. But employees are innocent people just doing their job. They have others depending on them. How did Judge Rosenthal see this?

Judge Rosenthal ruled that McClendon’s $100,000 loan should have gone to the IRS. The heck with the employees! Because McClendon did not turn over his own personal funds to the IRS, Judge Rosenthal ruled that McClendon’s actions constituted willfulness. Therefore, McClendon was personally liable under TFRP for the full $4.3 million TFRP assessment. It is a mystery to me why Judge Rosenthal did not limit McClendon’s exposure to only $100,000.

In law school, we learned the maxim – “Hard Cases Make Bad Law.”

No Relief In A Collection Due Process Hearing

If you are a target for the TFRP the IRS will send you Letter 1153 informing you of your exposure and giving you the opportunity to file a Protest with the IRS’ Appeals Division, where you can challenge the proposed assessment without first having to pay it. If you fail to file a timely Protest, the proposed assessment will become final and you will be subject to IRS Collection. As part of the collection process you will be sent a certified letter informing you of your rights to file a petition for a Collection Due Process hearing (CDP). This hearing affords you an opportunity to negotiate a monthly installment payment arrangement or make an Offer in Compromise. However, you cannot challenge your exposure and liability to the TFRP in a CDP hearing where you were given a previous notice and opportunity to be heard, but you failed to act.

The case of R.L. Anderson illustrates what happens to a person who sleeps on his or her right to challenge a TFRP assessment. Anderson sought to challenge the merits of the TFRP assessment during a follow-up CDP hearing. The U.S. Tax Court ruled that he slept on his rights, and was barred from raising the issues of responsibility and willfulness. (R. L. Anderson, TC Memo 2016-219, Dec. 60,750(M))


The EDD has the same type of personal level assessment as does the IRS in TFRP matter. The EDD version, however, is tougher than the IRS. The IRS TFRP rate is about 60% of the amount owed by the corporation or LLC. The EDD rate is a full 100% exposure. The EDD will use federal IRS cases as authority to justify its assessment process. So you can be certain that the McClendon case will now be part of the EDD’s legal authority arsenal.


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 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.

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.

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