IRS Required to Disclose Collection Efforts Against Other Responsible Persons

When a company fails to pay over the income taxes and FICA taxes it has withheld from employee wages, the IRS pursues collection actions against the company. If these actions prove fruitless, the IRS then looks to the "responsible persons" of the company who could have caused the company to turn over the payments, but who did not. It asserts penalties against the responsible persons under IRC §6672 in amounts equal to the unpaid tax.

If there are multiple responsible persons, the IRS may assert the full penalty against each responsible person. However, the IRS has a policy of only collecting the penalty once. Thus, if one responsible person pays, say, 60% of the penalty, the IRS will only try to collect 40% from the other responsible persons. Further, if the corporation later pays over part of the tax, the IRS abates a corresponding amount of the responsible person penalties against each responsible person.

Prior to last summer, the IRS was prohibited by law from disclosing to one responsible person its collection efforts against other responsible persons. The Taxpayer Bill of Rights 2, enacted on July 30, 1996, amended the Internal Revenue Code to provide that if a responsible person submitted a written request to the IRS, the IRS must disclose to such person the name of any other person against whom the IRS has asserted an IRC §6672 penalty and "whether the [IRS] has attempted to collect such penalty from such other person, the general nature of such collection activities, and the amount collected." IRC §6103(e)(9).

In a recent case, United States v. New York State Division of the Lottery, 1996 U.S. Dist. LEXIS 16840 (SDNY 11/14/96), a responsible person, DiBella, was lucky enough to win the lottery. He had the misfortune, however, to be a responsible person with respect to a company, CBM, which had not paid over its withheld employee income and FICA taxes. The IRS brought suit against the New York State Lottery to foreclose on DiBella's interest in the winning ticket to collect a responsible person penalty it had asserted against DiBella.

DiBella knew that there was another responsible person for CBM, Savite, who had organized a separate company, Monarch, to continue the same business. In the court case, DiBella sought discovery from the IRS of its collection efforts against Savite, CBM, and Monarch. DiBella argued that he needed to know what payments had already been made by Savite, CBM, and Monarch and any arrangements they had with the IRS for future payments. Without this information, DiBella claimed he could not intelligently assess his potential liability or enter into settlement discussions with the IRS.

The IRS conceded that §6103(e)(9) required it to inform DiBella about its collection efforts against Savite. However, the IRS argued that §6103(e)(9) did not authorize telling DiBella anything about any CBM or Monarch payments or arrangements.

Judge Knapp disagreed with both parties. He agreed that the statute does not require the IRS to disclose payments made by the corporate taxpayer. However, he was concerned that the IRS might have entered into an agreement with either CBM or Monarch for one or both of those companies to pay Savite's responsible person penalty.

The statute directed the IRS to disclose the "general nature of such collection activities" against the other responsible person. Judge Knapp found that any such agreements with CBM or Monarch for the payment of Savite's penalty were part of the "general nature" of the IRS' collection efforts against Savite. Accordingly, the judge ordered the IRS to disclose to DiBella any agreements it might have with Savite, CBM, or Monarch for the payment of Savite's penalty, as well as the amount collected pursuant to those agreements. It is heartening that the judge rejected the IRS' overly narrow interpretation of the statute.

One final note. A similar amendment to IRC §6103 made by the Taxpayer Bill of Rights 2 now authorizes the IRS to disclose, upon written request, to divorced spouses who filed joint returns, whether the IRS has attempted to collect a tax deficiency from the other spouse, the general nature of such collection activities, and the amount collected. IRC §6103(e)(8). Hopefully, the courts will not allow the Service to narrowly interpret the provision.

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