Law Firm Shareholders Liable for Trust Fund Recovery Penalties

The Internal Revenue Code requires employers to withhold certain taxes in “a special fund in trust for the United States” (sec. 7501(a)). IRS regulations require employers to pay these trust fund taxes to the IRS quarterly. Employers who fail to pay withheld taxes to the government are personally liable for the taxes under section 6672 of the Code. In general, the government can recover unpaid taxes if (1) the employer is responsible for collecting and paying withholding taxes, and (2) the individual willfully failed to collect and pay the withholding taxes. What is key is that the IRS can recover from any responsible person, not necessarily the most responsible person. The trust fund recovery penalty is often a trap for the unwary, including for partners and shareholders of law firms, as illustrated by Spizz v. United States, 120 A.F.T.R. 2d 2017-6719 (S.D.N.Y. Dec. 4, 2017). Spizz and Todtman were shareholders of the law firm Todtman, Nachamie, Spizz &…

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