Meaning of "reckless" in 6694(b)

The $5,000 per position penalty of 6694(b)applies if the return preparer is "reckless"

There is a great deal of judicial authority on the term "reckless" as equivalent the term "willfulness" in determining the trusft fund penalty under section 6672. Much of the concept of "reckless disregard" from judicial precedent helps define the term "reckless" under section 6694(b).

I have selected just one case, below, to make the point. The courts say that when a person responsible for the payroll taxes has a "reckless disregard" for the payment of the payroll taxes, that person meets the "willfulness" requirement of the 6672 statute. I have had cases where the IRS has made that argument. The "failure to take steps" to make sure that payroll taxes is being paid is really a "due diligence" standard. That the my main point. If a return preparer has not made any effort to determine if, for example, an expense or deduction meets the necessary requirements of a tax regulation or other published authority, that is a lack of due diligence and therefore is likely to be treated as "reckless" within the meaning of section 6694(b).

Keep in mind that the IRS examiners should be expected to be aggressive. An aggressive IRS examiner could easily say that the failure to monitor substantiation is "reckless." The biggest trap for the unwary tax return preparer is when the return preparer relies on every number provided by a client without verifying the quality of the data and the technical requirements for that data. Although the final regulations say you do not have to audit your client, you run the risk of draconian penalties when you do not use your maximum due dilligence to qualify the data for substantiation and technical support.




89-2 USTC ¶9581] J. Allen Dougherty, Plaintiff v. The United States, Defendant


In order for a "responsible person" to be liable under section 6672 he must have acted "willfully" in failing to collect, truthfully account for or pay over the delinquent and unpaid Federal employment taxes. Willfulness for purposes of this statute has been defined as "a deliberate choice voluntarily, consciously, and intentionally made to pay other creditors instead of paying the Government." White v. United States [67-1 USTC ¶9250 ], 178 Ct. Cl. 765, 778, 779, 372 F.2d 513, 521 (1967). Mere knowledge of a past delinquency does not impose strict liability on a responsible officer for delinquencies during his tenure. Godfrey, 748 F.2d at 1578. In addition, negligence in determining a tax delinquency is insufficient to constitute willfulness. Bauer, 211 Ct. Cl. at 289, 543 F.2d at 150; see also Bolding, 215 Ct. Cl. at 163, 565 F.2d at 672.

The "Reckless Disregard" Standard of Willfulness

"Willful conduct may also include a reckless disregard of an 'obvious and known risk . . . that taxes might not be remitted'." Godfrey, 748 F.2d at 1577 (citations omitted). "[I]f a responsible officer knows that the corporation has recently committed such a delinquency and knows that since then its affairs have continued to deteriorate, he runs the risk of being held liable if he fails to take any steps either to ascertain, before signing checks, what the state of the tax withholding account is, or to institute effective financial controls to guard against non-payment." Wright v. United States [87-1 USTC ¶9130 ], 809 F.2d 425, 428 (7th Cir. 1987) (citations omitted); see also United States v. Leuschner [64-2 USTC ¶9742 ], 336 F.2d 246, 248 (9th Cir. 1964). However, "merely because a corporate officer has check-signing responsibilities and his corporation is in financial trouble, it does not follow that he can be held liable for any and all failures to pay withholding taxes." Wright, 809 F.2d at 428. Even considering plaintiff's version of events, the record establishes that plaintiff acted willfully in that, during the tax quarters at issue, he recklessly disregarded his duty to collect and pay over VELCO's Federal employment taxes and ignored the risks that VELCO's Federal employment taxes would not be paid. Wright [87-1 USTC ¶9130 ], 809 F.2d 425.

In Wright v. United States [87-1 USTC ¶9130 ], 809 F.2d 425, 427-428 (7th Cir. 1987), the Seventh Circuit, found that the plaintiff in that case had acted willfully under section 6672 by acting with recklessness. The Wright court distinguished its case from Godfrey:

We emphasize that merely because a corporate officer has check-signing responsibilities and his corporation is in financial trouble, it does not follow that he can be held liable for any and all failures to pay withholding taxes. Nor have we any quarrel with Godfrey v. United States [84-2 USTC ¶9974 ], 748 F.2d 1568 (Fed. Cir. 1984), which held that mere knowledge of a past delinquency does not impose strict liability on a responsible officer for delinquencies during his tenure. But if a responsible officer knows that the corporation has recently committed such a delinquency and knows that since then its affairs have continued to deteriorate, he runs the risk of being held liable if he fails to take any step either to ascertain, before signing checks, what the state of the tax withholding account is, or to institute effective financial controls to guard against nonpayment. See Hornsby v. IRS, supra; United States v. Leuschner [64-2 USTC ¶9742 ], 336 F.2d 246, 248 (9th Cir. 1964). Wright did neither of these things.
Id. at 428.