Taxpayer liable for taxes misappropriated by payroll services firm.

• Author: O'Driscoll, David

After the Service notified A that it had underpaid its payroll taxes, A investigated and discovered that H, a company A hired to service its payroll accounting, had misappropriated tax funds collected from A.

Reliance

A taxpayer's reliance on a third party to fulfill its tax obligations does not relieve the taxpayer of responsibility for those obligations; see Robert Boyle, 469 US 241 (1985) (timely filing of returns and payment of taxes are solely the duties of the taxpayer and are not delegable). A concedes that it was required to collect and pay over employment taxes. Misappropriation by a third party does not relieve an employer of that obligation; see Frontier Business Technologies, Inc., 288 BK 663 (when a payroll services provider misappropriated funds it had received from its clients for payment of their payroll taxes, the clients owed the unpaid taxes to the IRS); see also Able Galletti, 541 US 114 (2004) ("when an employer fails to withhold and submit the requisite amount of employment taxes, Section 3403 makes clear that the liable taxpayer is the employer"). Although the Service may, in certain circumstances, abate a penalty for failure to make payment timely, the abatement does not extend to the unpaid tax principal; see Sec. 6404(e)(1).

Delay

The IRS may abate interest on a tax deficiency if it is attributable to unreasonable error or delay by a Service officer or employee in performing a ministerial or managerial act (Sec. 6404(e)(1)). However, delay or error attributable to the taxpayer are not grounds for abatement. A argues that the IRS held the case in abeyance pending the resolution of the criminal prosecution. However, it was not unreasonable for the Service to refrain from collecting the outstanding tax delinquency until the prosecution was resolved. Moreover, nothing prevented A from paying the delinquency in the interim.

Estoppel

A also relies on judicial estoppel, an equitable principle intended to prevent one party from asserting an "inconsistent or mutually contradictory position with respect to the same matter in the same or a successive series of suits"; see Scarano v. Central R.R., 203 F2d 510 (3d Cir. 1953). "It is not intended to eliminate all inconsistencies, however slight or inadvertent; rather, it is designed to prevent litigants from 'playing fast and loose with...