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Taxpayer off the hook for 100% penalty & attorneys’ fees

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in Office Management,Payroll Management

Yes, it is possible to beat the IRS in court—and make it pay your attorneys’ fees, as well. The Tax Court ruled that an employee who proved in court that she wasn’t responsible for 100% of her company’s unpaid payroll taxes was able to collect attorneys’ fees from the IRS. (Fitzpatrick v. Commissioner, T.C. Memo 2017-88, U.S. Tax Court, 2017)

Not a responsible person. Under tax code Section 6672, the IRS can assess you personally for 100% of your company’s undeposited payroll taxes, if you’re a responsible person who willfully failed to deposit those taxes. You are a responsible person if you have some check-signing authority. You don’t need to be a corporate officer or the company’s only responsible person. And all it takes to willfully fail to deposit your company’s payroll taxes is to pay other creditors before paying the IRS.

According to the information the IRS revenue officer had when she made a determination of liability, the employee was a responsible person: she invested in the company, opened bank accounts as secretary for the company, could sign checks, monitored the company’s bank account, contracted with a third-party payroll provider and authorized some spending.

At trial, however, the employee presented credible proof that she made no operational decisions for the company. The Tax Court found that she was mainly responsible for delivering checks, relaying electronic bank account balances and delivering mail that was sent to her private mail box.

After having established that, she wanted the IRS to pick up the tab for her attorneys’ fees. The Tax Court obliged and awarded her the statutory rate of $200 an hour (for 2017).

THE TAKEAWAY: This case is a reminder that the IRS will develop paperwork that’s in its favor, not yours. You shouldn’t take that paperwork at face value. Although most cases are settled because going to trial is time consuming and costly, sometimes it’s worth the trouble. It’s also possible to recover more than the statutory rate in attorneys’ fees. But to do that, you’ll have to prove that there are few tax lawyers who can handle your case, that your attorney possesses unique expertise, that your case is undesirable and that the IRS was unusually litigious.

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