Willful and Responsible – The IRS Test

When seeking to collect certain withholding taxes, the Internal Revenue Service will attach any individual who may be responsible, in any manner, for the collection and turning over of said tax.  This can be quite the wide net cast by an entity whose resources are effectively limitless and who does not have much incentive to back off of their collection attempts.  Because of this, it is important to know the test which the IRS will use to determine whether an individual is liable for the certain tax that is owed.

To start, the Internal Revenue Code, at section 6672, imposes the following duty:

“Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

Two conditions must be met before an individual can be held liable under this provision: (1) she must be responsible for the collection and payment of withholding taxes, and (2) she must willfully fail to collect and pay them over.  See Teel v. United States, 529 F.2d 903, 905 (9th Cir. 1976); Pacific National Ins. V. United States, 422 F.2d 29 (9th Cir. 1976).  The test of responsibility under section 6672 is a functional one, which focuses upon the degree of control and influence which the individual exercised over the financial affairs of the corporation and, more specifically, over the disbursement of funds.  See Taubman v. United States, 499 F.Supp. 1133 (E.D. Mich. 1978).  Liability attaches to those with power and responsibility within the corporate structure for seeing that the taxes withheld from various sources are remitted to the Government.  Scott v. United States, 354 F.2d 292, 296; see also Gefen v. United States, 400 F.2d 476, 482 (5th Cir. 1968), cert. den’d, 393 U.S. 1119, 89 S.Ct. 990, 22 L.Ed.2d 123.

The Court in Benoit v. Commissioner of Revenue specifically sets out indicia of responsibility as follows:

1)    ID of officers, directors & stockholders;

2)    Ability to sign checks on behalf of the corporation;

3)    ID of individual who hires and fires employees;

4)    ID of individual who was in control of financial affairs; and,

5)    Those with an entrepreneurial stake in the corporation.

Benoit v. Commissioner of Revenue, 453 N.W.2d 336, 344 (Minn. 1990).   Federal law treats the person with effective power to pay the tax as the “responsible person.”  Howard v. United States, 711 F.2d 729, 734 (5th Cir. 1983).  Courts read the term “responsible person” expansively.  O’Callaghan v. United States, 943 F.Supp. 320, 324 (S.D.N.Y. 1996).  An “employee with the power and authority…to direct the payment of taxes is a responsible person within the meaning of section 6672.”  Feist v. United States, 221 Ct.Cl. 531, 607 F.2d 954, 960 (1979).

In the responsible person analysis, the answer often pivots on whether the person had power to make tax payments in light of the enterprise’s financial organization and decision-making structure.  O’Connor v. United States, 956 F.2d 48, 51 (4th Cir.1992).  This is fact-intensive; in some instances, employees who perform clerical functions of collecting and paying taxes are not responsible persons.  Feist, 607 F.2d at 957, 960.

While that sums up the responsible person analysis, what of the willful person?  A number of courts have addressed the “willful” component of section 6627.  These courts have defined the term “willful” in this context to mean voluntary, conscious and intentional (as opposed to accidental) decisions not to remit funds properly withheld to the Government. Spivak v. United States, 370 F.2d 612, 615 (2d Cir. 1967), 499 F.2d 90, 94 (4th Cir. 1962); Hewitt v. United States, 377 F.2d 921, 924, 22 A.L.R.3d 1 (5th Cir. 1967); Flan v. United States, 326 F.2d 356, 358 (7th Cir. 1964); Bloom v. United States, 272 F.2d 215, 223 (9th Cir. 1959).  The Court in Kizzier v. United States stated that

“A responsible person acts willfully within the meaning of [section] 6672 if he acts in such a manner that he knows or intends that, as a consequence of his conduct, withheld employment taxes belonging to the government will not be paid over but will be used for other purposes.”

Kizzier v. United States, 598 F.2d 1128, 1132 (CA 8 1979).

Therefore, to be held liable for certain withholding taxes not withheld, the individual must both be responsible (i.e. be required to withhold and pay over certain taxes) as well as willful (i.e. intentionally carry out conduct that brings about a certain known consequence).  Failing to meet one of these criteria will alleviate an individual from the penalties imposed by the IRS concerning withholding.

Internal Revenue Service Circular 230 Disclosure: In compliance with IRS requirements, you are on notice that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.



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