SOL on trust fund recovery assessments.

An employer is required to deposit with the Federal government the taxes withheld from its employees' wages. Should the employer fail to pay over such taxes, the IRS has the right, under Sec. 6672, to assess a penalty equal to the amount of taxes due against all persons considered responsible for the withholding and payment of taxes. This penalty is often called the"Trust Fund Recovery Penalty" or the "100% Penalty Tax."

The issue occasionally arises in cases under Sec. 6672 as to the application of the statute of limitations (SOL) for an assessment of the Trust Fund Recovery Penalty. The Service has consistently argued that neither the general SOL: under Sec. 6501(a) (i.e., three years from the filing date of the return) nor any other SOL applies to Sec. 6672 assessments. The IRS's rationale is that the general period of limitations is only triggered by the filing of a return reporting the tax to be assessed and to be paid by the filer. Since the Sec. 6672 penalty does not appear on a return, the Service would argue that the general three-year limitations period contained in Sec. 6501 (a) does not apply.

Fortunately for potential responsible parties, the IRS's position will no longer be asserted. The Third Circuit recently joined the Fifth, Sixth, Seventh, Ninth and Federal Circuits in holding that the Sec. 6672 responsible person penalty assessments are subject to the three-year SOL and that the running of the limitations period is triggered by the filing of the employer's quarterly employment tax return (Lauckner, 68 F3d 69 (1995), aff'g DC NJ., 1994). Recognizing that a majority of the circuits had held against it, the IRS recently announced that it had acquiesced in the decision in Lauckner (AOD 1996-006).

Comment: Form 941, Employer's Quarterly Federal Tax Return, is due on the last day of the month following the end of the calendar quarter (e.g., April 30 for the quarter ending March 31). For SOL purposes, the trust fund recovery penalty is assessable within three years from April 15 of the year following the calendar year in which the taxes were required to be withheld (Sec. 6501(b)(2); Regs. Sec. 301.6501(b)-1(b)). Thus, if quarterly returns of employment tax are filed for the four quarters of 1996 on Apr. 30, 1996, July 31, 1996, Oct. 31, 1996 and Jan. 31, 1997, the SOL for assessment with respect to the tax required to be reported on such return is measured from Apr. 15, 1997.