CPA not liable for client's trust fund penalty.

V purchased a restaurant (M) and agreed to assume all of its outstanding liabilities, including a payroll tax debt. V asked an accounting firm (S) to continue to handle the payroll for M and perform some of the bookkeeping services. S also began to review accounts payable and prepare corporate tax documents.

A is a CPA at S who performed the contracted services. He was a signatory on all of M's bank accounts, but could only issue checks on V's prior approval. V always decided which vendors to pay. A supervised the preparation of M's payroll checks. Most of the checks were forwarded to V for signature before distribution to employees. However, a few of the employees, including V, his wise, his cousin, and the general manager, would stop at S to personally pick up their paychecks. A signed these payroll checks as a signatory on the payroll account. His only other involvement with the payroll was preparing quarterly tax returns. He also assisted V with prioritizing creditor payments.

Trust Fund Liability

A regularly reviewed M's outstanding payroll tax liability with V. V was aware of the outstanding tax liability when he purchased M, and A continually reminded V to pay this debt. A and V met with the IRS to discuss the delinquent payroll taxes and negotiated a payment plan; however, M's payments toward the outstanding tax liability decreased. As a result, the IRS imposed a trust fund penalty. A became aware of this penalty when he attempted to refinance a mortgage in January 2001 and discovered Federal tax liens on his property.

Legal Standards

The Sec. 6672 trust fund penalty applies to "[a]ny 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." For a person to be held liable under Sec. 6672, he or she must (1) be a "responsible person" required to truthfully account for, collect, and pay over the taxes; and (2) willfully fail to ensure that the withholding taxes were paid.

The "crucial inquiry is whether the person had the 'effective power' to pay the taxes--that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay the taxes owed" (Plett, 185 F3d 216 (4th Cir. 1999))."[T]he 'responsible person' is not limited to one person in a company, but may include many persons connected with the same employer."

Factors

According to the Fourth Circuit, factors indicating the requisite authority include whether the employee (1) served as an officer of the company or as a member of its board of directors; (2) controlled the company's payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the corporation's day-to-day management; (5) possessed the power to write checks; and (6) could hire and fire employees.

These factors, however, are only indicia of a responsible person; no one factor is determinative. In weighing the totality of the circumstances, a court must "undertake a pragmatic, substance-over-form inquiry" to determine whether an employee is a responsible person (Plett, 185 F3d at 219).Thus, a court's analysis of whether the party had the status, duty and authority to avoid the default is necessarily fact-intensive.

Applying those indicia here, the following facts are clearly undisputed: A did not serve as an officer or board member of M; he did not participate in M's day-to-day management; and he did not have the authority to hire or fire employees. A did not "control" the company's payroll for purposes of the responsible person inquiry. He never had the authority to issue checks on his own initiative. S's check-signing authority essentially constituted a "mechanical duty" and lacks probative weight in the responsible person determination.

The preponderance of the evidence establishes that A did not have effective power to pay M's withholding taxes. In this case, only one factor is met--he had check signing authority, which is minimally probative of responsibility. Moreover, his duties largely comported with the services typically offered by a CPA. Weighing the totality of the circumstances and applying the Plett factors, the court concludes that A is not liable for the Sec. 6672 mast fund penalty. ANTHONY SECRET, DCWV, 5/6/05

REFLECTIONS: The IRS also argued that A admitted liability based on statements he allegedly made to an IRS agent and recorded on Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Tax. However, the court found that the form contained no express admission of liability, and the alleged statements were vague and uncorroborated by independent evidence at trial.