Illinois District Court Rules that IRS Must Pay Attorney Fees to Innocent Party in Payroll Case

Posted on Sep 11, 2012

The IRS is powerful, but this ruling sends a clear message to the Service that they better get it right when it comes to collecting company payroll taxes against individuals.  If your company owes payroll taxes, the Service can and will assess "responsible persons" personally with a portion of the payroll tax debt.  That portion of the tax is called the Trust Fund Recovery Penalty.  Trust fund makes up about 60% of the whole payroll tax.  Responsible persons are typically business owners or payroll managers who have the ability to write checks and make decisions concerning which creditors get paid or not. 

In Tarpoff, D.C. Ill., the Federal District Court of Illinois held the IRS responsible for paying the attorney fees of an individual the IRS was wrongfully hounding for trust fund penalties.   The IRS admitted that its primary reason for chasing the individual was that the true owner of the company had passed away and the Service could not collect on the owner's estate.  What an IRS thing to admit!  The Service was likely so forthcoming about the tactic because they clearly see nothing wrong with it.  The individual had check writing authority, but only wrote checks as directed by the owner.  The individual had no knowledge of the company's financial condition or that the company was even behind on payroll taxes. The court awarded the individual taxpayer $25,000 for attorney's fees the individual had to pay to defend himself from the IRS' tactics.

This is a great development.  Perhaps the IRS will think twice about oppressively tagging innocent folks with trust fund.  Na-a-a-a, the IRS hates to lose, but $25,000 is chump change in the big scheme of things for the IRS.  It will continue to be worth the risk for the great reward of hassllng innocent parties into paying the trust fund portion of payroll taxes when they can't collect it against the true responsible persons for the company.  When a court strips an IRS revenue officer (those charged with the task of determining "responsible persons") of sovereign immunity for his actions and imposes punitive damages for this tactic, I'll let you know.

Travis Watkins
Senior Tax Attorney