Former Partner Liable for Trust Fund Penalty

A taxpayer who asserted he was no longer a partner in a business during the periods at issue was nevertheless held to be a responsible person and liable for the 100% penalty for failure to pay over withheld employment taxes. The taxpayer will not be allowed to challenge the liability before the IRS Appeals Office because he had had a prior opportunity to dispute the liability and failed to do so, the Tax Court held ( Smith, T.C. Memo. 2015-60).

The taxpayer received a Letter 1153, Trust Fund Recovery Penalty, on Oct. 20, 2010, in which the IRS proposed to assess trust fund penalties for failing to collect and pay over employment taxes for Vito’s South Limited Partnership for the first three quarters of 2009. The taxpayer had 60 days to appeal or protest the assessment by letter to the IRS.

The taxpayer claimed he challenged this liability through a letter from his CPA dated Nov. 11, 2010, in which he asserted that he had withdrawn from the partnership before Jan. 1, 2008, and therefore was not associated with the company during the period at issue. However, the taxpayer could not prove that his CPA had ever sent the letter to the IRS: The CPA could not produce a certified-mail receipt, and the IRS claimed it could find no copy of the letter in its files.

For some reason, the taxpayer agreed that the Tax Court would consider only whether he had had a prior opportunity to dispute his liability for the trust fund penalties. If the court found he had not, the case would be sent back to the IRS Appeals Office to consider his appeal. If he had, the deficiency would stand. Once the taxpayer agreed to this, the only issue that could be considered was whether he had had an opportunity and failed to take it.

The Tax Court explained that a taxpayer who “received a Letter 1153, providing him the opportunity to administratively appeal his liabilities for the trust-fund-recovery penalty, and who declines to make such an appeal, had an opportunity to dispute the underlying liability” (slip op. at 15). Finding that the taxpayer failed to prove that the Nov. 11 letter from his CPA was ever actually mailed, either by a mailing receipt or by testimony, the court agreed with the IRS that the taxpayer had a prior opportunity to contest the liability that he did not take. Therefore, the assessment was upheld.

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