CCA addresses trust fund recovery penalties after worker reclassification

Plain-English summary

Chief Counsel Advice concludes that a trust fund recovery penalty may apply even when an employer never withheld taxes from workers it treated as independent contractors. The advice explains that a responsible person may be liable for failing to collect or withhold, account for, or pay over trust fund taxes. It also distinguishes the employer's employment tax liability from the responsible person's separate penalty liability. A closing agreement with the employer did not bind responsible persons who were not parties to it, although the reduced section 3509 calculation could make willfulness difficult to establish for the covered period.

Ruling snapshot

• Question: Can a trust fund recovery penalty apply when no taxes were withheld, and does an employer closing agreement prevent the IRS from pursuing it?
• Outcome: Advice given
• Key authorities: IRC §§ 6672 and 3509; Slodov v. United States, 238, 246-47 (1978)

Full text (IRS public release)

ID: CCA-591112-13
Office: --------------
UILC: 6672.00-00
Number: 201323022
Release Date: 6/7/2013
From: ----------
Sent: Wednesday, February 13, 2013 1:52 PM
To: -------------------------
Cc: ----------------------------
Subject: TFRP reclassification question ---------

Hi: Below is our response to the issues that you raised. My reviewer has read and
approved this advice.

The first issue is whether there can be a TRFP when no taxes were ever withheld from
the independent contractor’s/employee’s wages. The short answer to this is “yes.” The
Supreme Court has held that a responsible person may be held responsible for the
TFRP if he or she willfully fails to collect the trust fund taxes, or to truthfully account for
the taxes, or to pay over the taxes to the Service. Slodov v. United States, 238, 246-47
(1978). In this case, the responsible person failed to perform all three requirements.
His or her failure to collect/withhold the employment taxes is in and of itself sufficient for
a TFRP assessment.

The second issue is whether the “IRS is precluded from raising the Trust Fund
Recovery Penalty issue by the closing agreement it signed with the taxpayer….” In the
factual situation before us, the taxpayer/corporation treated its employees as
independent contractors for tax years -------, -------, and -------. The closing agreement
signed by the taxpayer/corporation and the Service provides that the Service will assess
and collect only the employment taxes owed for -------, thus reclassifying taxpayer
corporation’s workers as employees for that year, and will “discharge” the taxes owed
for ------- and -------. The agreement also provides that the Service will not disturb the
taxpayer’s classification of workers as independent contractors for tax purposes for any
period from January 1, ------- through December 31, -------. The amount due for ------- is
the reduced section 3509 amount, not the full amount of employment taxes. Section
3509 provides a lower calculation of employment taxes in reclassification cases in which
the taxpayer’s classification of workers as independent contractors was supported by
reasonable cause.

An employment tax liability and the corresponding TFRP are two different liabilities: one
is owed by the taxpayer/employer; the other is owed by the responsible person. In this
case, the Service entered into an agreement with the taxpayer/employer alone pursuant
to which the taxpayer/employer is liable for just one of the three years at issue.
Although the responsible persons were not parties to this closing agreement, we believe
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the Service’s application of the lower, section 3509, calculation for ------- would make it
extremely difficult, if not impossible, to establish willfulness.