Magazine article The CPA Journal

Responsible Person Penalty: A Look at the Elements

Magazine article The CPA Journal

Responsible Person Penalty: A Look at the Elements

Article excerpt

Over the past decade, substantial conflict has arisen between taxpayers and the IRS over the application of IRC section 6672(a), sometimes called the "100% penalty":

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.

The IRC section 6672 penalty is assessed and collected in the same manner as the tax on which it is levied. The purpose of the penalty is to promote compliance with the duty to withhold and remit taxes from an employee's paycheck. Thus, the IRS's main target for collection of nonremitted sums is the person "responsible" for collection and remission.

Application of section 6672 necessitates ascertaining what constitutes a "responsible person"-because the penalty can apply only to responsible persons-and what constitutes willful failure to collect and remit, or failure to truthfully account.

A Question of Defense

The courts have broadly interpreted "responsible person" as those persons that possess either the actual authority or the capability of paying the tax. In addition, the expression has been construed to include persons that hold corporate office, maintain control over corporate finances, have substantial ownership interest in the entity, and have the authority to hire or fire. As expressed in Denbo v. United States [98 F.2d 1029 (10th Cir. 1993)], check-writing authority is not a necessary condition, so long as one has significant authority (effective control) over corporate finances. In many instances, more than one person can be considered a responsible person.

For purposes of section 6672, "willfulness" has encompassed "voluntary, conscious and intentional preference of other creditors over the government claims." The expression also includes the failure to satisfy a duty to investigate or to correct faulty management upon being notified of failure to meet payroll obligations. Certain courts have indicated that reckless disregard or gross negligence may satisfy the willfulness criteria.


In Thomas Metzger [No. 00-76820CIV-LENARD (U.S.D.Ct. S. Dist. of Florida, 2002)], the District Court, in remanding a case to the Bankruptcy Court, indicated that the burden of proof for avoiding assessed section 6672 penalties falls upon the taxpayer to establish that the taxpayer is not a responsible person or did not act willfully. The government is presumed to be correct in its assessment, and such presumption has been adopted by a majority of the circuit courts that have addressed the issue.


The Bankruptcy Court typically becomes involved when a taxpayer files for bankruptcy and one of the claims for relief concerns an alleged IRC section 6672 penalty. Included among recent bankruptcy cases are: In re Ronald D. Nutt, et al. (88 AFTR2d 2001-5235) aff'd No. 6:02CV1346 (U.S.D. Ct. Mid. Dist., FL, 2003, United States v. Thomas J. Metzger, et ux. (No. 00-7682-CIV-LENARD), and In re Macagnone [85 AFTR2d Par. 2000-452 (2000)]. In each of these cases, the court ruled in favor of the taxpayer (although Metzger was overturned on appeal). The cases are instructive about possible arguments on behalf of the taxpayer.

In Nutt, the taxpayer asserted that he was not subject to the section 6672 penalty because the failure to withhold was not willful. The case concerned a company formed by Nutt in 1975 in which he possessed "exclusive and direct management" until mid-1993, at which time another person was appointed to serve as president. Nutt returned to the position of president in May 1995. Payroll taxes were not paid until the end of 1995, after his return to the position of authority. …

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