Opinion ID: 6984410
Heading Depth: 2
Heading Rank: 1

Heading: Substantive Legal Standards

Text: The Code requires employers to withhold income and FICA taxes from the wages of their employees. See 26 U.S.C. §§ 3102(a) (FICA taxes), 3402 (income taxes). Section 7501(a) of the Code requires employers to remit these withholding taxes to the IRS, see 26 U.S.C. § 7501(a), and IRS regulations require that these remittances be made on a quarterly basis. 26 C.F.R. §§ 31.6011(a)-1 (FICA taxes), 31.6011(a)-4 (income taxes). If an employer withholds taxes from its employees’ wages, but does not remit those taxes to the IRS, the government credits the employees with having paid their taxes and may not seek to collect the unremitted taxes from them. Slodov v. United States, 436 U.S. 238, 243, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978); Fiataruolo v. United States, 8 F.3d 930, 938 (2d Cir.1993). Instead, to protect the government from losses sustained by an employer’s failure to remit withholding taxes, section 6672 of the Code allows the IRS to shift liability for the unremitted taxes from the employer to each individual responsible for the failure to remit: 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 hable to [sic] a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. 26 U.S.C. § 6672(a). Thus, under section 6672(a), an individual may be held liable for unpaid withholding taxes if: (1) he or she was a “responsible person” for collection and payment of the employer’s taxes; and (2) he or she “willfully” failed to comply with section 7501(a). Fiataruolo, 8 F.3d at 938. “The person against whom the IRS assesses a § 6672 tax penalty has the burden of disproving, by a preponderance of the evidence, the existence of one of these two elements.” Id.
In determining whether an individual is a “responsible person” within the meaning of section 6672(a), “[t]he determinative question is whether the individual has significant control over the enterprise’s finances.” United States v. Rem, 38 F.3d 634, 642 (2d Cir.1994) (internal quotations omitted). No single factor is dispositive in evaluating whether an individual has significant control; rather, the determination must be made in light of the totality of the circumstances. Id. The relevant circumstances include whether the individual: (1) is an officer or member of the board of directors, (2) owns shares or possesses an entrepreneurial stake in the company, (3) is active in the management of day-to-day affairs of the company, (4) has the ability to hire and fire employees, (5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (6) exercises control over daily bank accounts and disbursement records, and (7) has check-signing authority. Id. (quoting Fiataruolo, 8 F.3d at 939). “[I]t is not necessary that the individual in question have the final word as to which creditors should be paid in order to be subject to liability under ... section” 6672(a). Id. (internal quotations omitted). And while section 6672(a) is not meant to ensnare those who have mere “technical authority” or a “titular designation,” the section encompasses all those individuals connected closely enough with the business to prevent the tax default from occurring. Id. As a result, “[m]ore than one individual may be a responsible person within the meaning of § 6672(a).” Id.; see also Fiataruolo, 8 F.3d at 939 (“Significant control may be shared by several people within a company, all of whom may be found responsible for a tax delinquency.”).
Even a responsible person may not be held personally liable under section 6672(a) unless his or her failure to collect, account for, or remit withholding taxes was willful. 26 U.S.C. § 6672(a). In order to satisfy the willfulness requirement, a responsible person need not act out of an evil motive or an intent to defraud. Rem, 38 F.3d at 643. Instead, “[t]he principal component of willfulness is knowledge: a responsible person acted willfully within the meaning of § 6672(a) if he (a) knew of the company’s obligation to pay withholding taxes, and (b) knew that company funds were being used for other purposes instead.” Id. Thus, failures are willful within the meaning of section 6672(a) if they are “ ‘voluntary, conscious and intentional—as opposed to accidental—decisions not to remit funds properly withheld to the Government.’ ” Kalb v. United States, 505 F.2d 506, 511 (2d Cir.1974) (quoting Monday v. United States, 421 F.2d 1210, 1216 (7th Cir.1970)). “Willful conduct may also include a ‘reckless disregard for obvious and known risks’ as well as a ‘failure to investigate ... after having notice that withholding taxes have not been remitted to the Government.’ ” United States v. Landau, 155 F.3d 93, 101 (2d Cir.1998) (quoting Kalb, 505 F.2d at 511). That said, this Circuit recognizes a so-called “reasonable cause” exception to section 6672(a) liability: “[A] responsible person’s failure to cause the withholding taxes to be paid is not willful if he [or she] believed that the taxes were in fact being paid, so long as that belief was, in the circumstances, a reasonable one.” Rem, 38 F.3d at 643 (citing Kalb, 505 F.2d at 511). However, even if a responsible person did not know contemporaneously of the company’s nonpayment of withholding taxes, he or she will be held hable for any nonpayment if, when he or she became aware of the delinquency, the company had liquid assets with which to pay the overdue taxes. Id.