The Tax Court’s January calendar was crowded with cases exploring procedural requirements to assess penalties under the Internal Revenue Code (the “Code”). The uniform thread connecting these cases is the Code’s requirement that penalties typically must receive managerial approval before assessment. The Tax Court’s recent decisions carefully parse statutory language to clarify when managerial approval is required. In doing so, the Tax Court has created a new defense for taxpayers facing the Trust Fund Recovery Penalty (the “TFRP”). In Chadwick v. Commissioner , 154 T.C. No. 5 (2020), the Tax Court held that the TFRP is a “penalty” that requires managerial approval.

The TFRP is a collection tool that enables the IRS to hold individuals personally liable for a business’ failure to remit withheld federal payroll taxes. To hold an individual personally liable, an IRS employee – typically a Revenue Officer – must first investigate to determine if assessment of the TFRP is appropriate. If the Revenue Officer concludes that assessment of the TFRP is appropriate, the Revenue Officer prepares a written recommendation proposing the assessment. If the IRS follows proper procedures, the written recommendation receives managerial approval and the TFRP is assessed.  Chadwick establishes a defense for the IRS’ failure to follow this procedure.

Prior to Chadwick , the TFRP was considered a tax, not a penalty. This meant that managerial approval prior to assessment was not required. If the IRS assessed the TFRP without prior managerial approval, the assessment was valid. The Chadwick decision upends this precedent. The TFRP is now a penalty. If the IRS fails to secure managerial approval prior to assessment, the assessment is invalid.

Invalidating TFRP assessments based on failure to follow proper procedures provides taxpayers with a powerful new defense against IRS collection actions. Employing the defense requires strict attention to timing. An early challenge could leave the IRS with enough time to correct its error and issue a valid assessment before the statute of limitations expires. Waiting too long on the other hand, or failing to identify an invalid assessment early enough in the collection process, can mean losing the ability to challenge the invalid TFRP assessment.

Chadwick forges a powerful new defense tool against collection of the TFRP, but wielding the tool is no simple task. The tax attorneys at McLaughlinQuinn LLC regularly represent clients in connection with tax controversy matters including cases involving the assessment and collection of the TFRP. For more information on this newsletter, contact Thomas P. Quinn, Partner at This email address is being protected from spambots. You need JavaScript enabled to view it. or Kathryn S. Windsor, Senior Tax Counsel at This email address is being protected from spambots. You need JavaScript enabled to view it. .