When a taxpayer makes a voluntary payment to the IRS, the taxpayer has the option to designate the application of the payment to certain periods and/or taxes.  For example, if a corporation owes federal employment taxes and the corporation desires to make a partial payment towards the past due employment taxes, the corporation or an authorized individual may designate the payment towards the “trust fund portion” of employment taxes due.  In this manner, the payment reduces not only the employment taxes owed, but also the potential liability for persons who may have been liable or may be subsequently found to be liable for so-called trust fund recovery penalties (“TFRPs”) under Section 6672 of the Code.

On July 23, 2021, IRS Chief Counsel released a Chief Counsel Advice Memorandum on this issue, and it serves as an important reminder to tax professionals and taxpayers regarding the option to designate payments and also the requirements taxpayers must follow to do so.

Trust Fund Recovery Penalties Generally

The Code imposes TFRPs on “responsible persons” who willfully (or in some cases, recklessly) fail to collect, account for, and pay over employment taxes to the United States.  Generally, a person is a responsible person if the person had a duty to collect, account for, and pay the trust fund taxes at issue.  Moreover, a responsible person is willful when the person has knowledge of the unpaid taxes and engages in a voluntary, conscious, and intentional act not to pay them.  Thibodea v. U.S., 828 F.2d 1499, 1505 (11th Cir. 1987).

Most of the time, the central question in determining whether a person was a responsible person hinges on the person’s duty, status, and authority.  Gustin v. U.S., 876 F.2d 485, 491 (5th Cir. 1989); see also Jean v. U.S., 396 F.3d 449, 454 (1st Cir. 2005) (“[T]he crucial inquiry is whether the person had the effective power to pay the taxes—that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay the taxes owed.”).

Federal courts and the IRS often look at various factors to determine whether a person is a responsible person.  In the Fifth Circuit, these factors include whether the person:  (1) held an office or owned stock in the corporation; (2) managed the day-to-day operations of the business; (3) made decisions as to the disbursement of funds and the payment of creditors; and (4) had check-signing authority.  Barnett v. IRS, 988 F.2d 1499, 1455 (5th Cir. 1993); Turnbull v. U.S., 929 F.2d 173, 178 (5th Cir. 1991). No single factor is determinative.  Barnett, 988 F.2d at 1455.

But, being a responsible person in and of itself is not sufficient for TFRP liability.  Instead, the responsible person must also be “willful.”  For these purposes, the person must have had awareness of the unpaid taxes and have engaged in an act resulting in non-payment.  Mazo v. U.S., 591 F.2d 1151, 1157 (5th Cir. 1979).  For example, a responsible person who has knowledge of unpaid employment taxes and makes payments to other creditors can be held willful.

Generally, TFPRs are assessed and collected in a similar manner as other federal taxes.  See I.R.C. § 6671(a).  Although TFRPs are not reported on a particular tax return, the IRS looks to the applicable employment tax return of the employer to determine the assessment period for the TFRP.  Lauckner v. U.S., 68 F.3d 69 (3d Cir. 1995).  If no employment tax returns have been filed, the IRS may assess the TFRP at any time.  See I.R.C. § 6501(c)(3); see also CCA 200532046.  After the TFRPs are assessed, the IRS has 10 years from the date of the assessment to collect the TFRPs.  See I.R.C. § 6502(a)(1).  Significantly, bankruptcy does not discharge an individual from liability for TFRPs.  See U.S. v. Sotelo, 436 U.S. 268 (1978); Matter of Severance, 593 F.2d 4 (5th Cir. 1979).

CCA 202129007.

In the CCA, IRS Chief Counsel was asked whether a particular taxpayer could designate a payment to the trust fund portion of certain past-due employment taxes.  The IRS indicated that the general rule is that a taxpayer may designate a voluntary payment—however, to be recognized by the IRS, the taxpayer must be specific, must make the designation in writing, and the designation must be made at the time the payment is made.  Thus, if the payment is made through IRS collection measures, the IRS is not required to designate the payment according to the directions of the taxpayer.

The IRS also recognized that in many cases taxpayers may make partial payments towards assessments for more than one tax period.  If the taxpayer fails to provide specific written instructions vis-à-vis the application of the payment, the IRS is permitted to apply the payment in a manner “serving the best interests of the government.”  That is, the IRS may apply the payment to satisfy the non-trust fund portion of the employment taxes first with any balance being applied to the trust fund portion.

A simple example illustrates these rules.  Assume a corporation owes $200,000 of employment taxes for the third quarter of 2020.  The corporation has filed a Form 941 reporting the employment taxes.  The IRS has not yet assessed TFRPs against any responsible persons.  The corporation wishes to make a payment of $25,000 towards the outstanding $200,000 of employment taxes.

On these facts, the corporation could (and probably should) designate the $25,000 payment towards the trust fund portion of the employment taxes.  By designating the voluntary payment in this manner, the IRS will reduce the employment taxes by $25,000, but will further reduce the trust fund portion (and potential TFRP) by $25,000.  If the corporation simply remits the $25,000 payment, the IRS will likely apply the $25,000 to reduce the employment taxes to $175,000—however, the IRS will also likely apply the voluntary payment towards the non-trust fund portion, which will leave potential TFRP exposure unchanged.


As shown above, there is more than one way to submit a payment to the IRS.  In cases of unpaid employment taxes, corporations (or their shareholders) can designate voluntary payments towards the trust fund portion, thereby reducing their potential TFRP liability in the event the employment taxes are not paid.  To make an effective and proper designation, taxpayers should ensure they follow all of the administrative rules the IRS requires to designate a payment, as discussed in CCA202129007.

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