Check Signing Activity Not Sufficient for Trust Fund Penalty

The IRS will often assert trust fund recovery penalties against anyone who signs checks written on the business checking account. The court addressed this in Shaffran v. Commissioner, T.C. Memo. 2017-35, concluding that some check signing activity alone is not sufficient to impose a trust fund recovery penalty. The case provides some insight as to how the IRS assesses these penalties.

The facts and procedural history are as follows:

  • The case involved unpaid employment taxes for a restaurant.
  • The restaurant had gone out of business before the IRS began its review of the unpaid employment taxes.
  • The IRS revenue officer assigned the case spoke to the former landlord and was told that Mr. Shaffran was the bookkeeper for the restaurant.
  • This was the sole information the IRS revenue officer used to determine that Mr. Shaffran was a responsible person and liable for the trust fund recovery penalty.
  • The IRS mailed Mr. Shaffran a letter letting him know that the IRS was assessing the trust fund recovery penalty against him, but the letter was intercepted by the restaurant owner and not received by Mr. Shaffran.
  • Mr. Shaffran was not the bookkeeper. The facts suggest that he was basically a friend of the individuals who owned the restaurant who assisted with the restaurant occasionally.
  • This help included writing four checks from the business checking account when the owners were on vacation.
  • The IRS issued an administrative summons to the bank to obtain the restaurant’s checking account records and confused the owner’s signature on the checks with Mr. Shaffran’s signature.

The issue for the court was whether these facts justify holding Mr. Shaffran liable for the trust fund recovery penalty. This turned on whether he had the ability to pay other creditors in lieu of the IRS. The court concluded that he did not:

The preponderance of the evidence establishes that petitioner lacked sufficient control over Restaurant Group’s affairs to avoid the nonpayment of its employment taxes during the tax periods in question. Petitioner was not an officer, director, employee or owner of Restaurant Group at any time. He was never an authorized signatory on Restaurant Group’s bank accounts. It is also clear from petitioner’s credible testimony and the administrative record that he: (1) did not have the authority to hire and fire Restaurant Group’s employees; (2) had no duty to, and did not, review or reconcile Restaurant Group’s bank statements; and (3) had no control over disbursements and decisions pertaining to Restaurant Group’s bank accounts, including the payroll account. Furthermore, there is no evidence that petitioner had any involvement in the preparation or filing of Restaurant Group’s employment tax returns or the payment of its employment taxes.

This case is an instance where the penalties should not have been imposed based on an unconfirmed statement that the person was a bookkeeper and corroborated by a mistaken belief that the person signed checks for the business. These are facts that a proper investigation would have disclosed. The IRS revenue officer assigned to the case did not do this investigation and their front line manager did not ensure that the revenue officer worked the case properly.

On appeal, the IRS settlement officer proposed to place the case in currently not collectible status and to abate the penalties for several of the tax periods. The settlement officer should have recorded these facts and proposal in an appeals memo or case closing record. Either this was not done (or the memo or closing record was vague) or the appeals team manager did not review the file properly before closing the case. The case may even have been sent to IRS review in collections or in appeals, which would mean that the reviewer or reviewers did not have enough information in the file to see the issue or they missed it. All-in-all, this means there were four to six IRS employees tasked with ensuring that the correct result was reached and, given the court decision, every one of them failed Mr. Shaffran.

The case serves as a reminder that the IRS is not perfect. IRS employees make a lot of decisions and they often do so with limited and flawed information. It is up to taxpayers to be vigilant and be willing to push back even when their case is reviewed by several different IRS employees at different levels within the IRS. With the trust fund recovery penalty, in particular, taxpayers should not accept that they are liable for the penalty just because they signed a few checks.