Tax Byte
Failure to Pay Employment Taxes Gets Personal When Tax Court Rules Against Tax Professional (United States v. Tax and Bankruptcy Attorney, PLC, and Kenneth Keate., (US District Court for the District of Minnesota, NO. 0:22-CV-02928 (Nov. 27, 2024))
In a case that should serve as a cautionary tale for all tax practitioners advising business clients, United States v. Tax and Bankruptcy Attorney, PLC and Kenneth Keate demonstrates the severe personal consequences that can result from improper handling of employment taxes. The District Court granted summary judgment against both a tax professional’s business and the professional personally, highlighting the IRS’s aggressive pursuit of trust fund tax violations, particularly when committed by those who should know better.
The History of TAB and Keate:
Kenneth Keate, an attorney who specialized in tax and bankruptcy, was the sole owner and president of Tax and Bankruptcy Attorney, PLC (“TAB”). The IRS assessed several liabilities against both Keate and his business:
- TAB failed to pay employment taxes for 16 quarters between 2014 and 2020, despite filing returns acknowledging the taxes owed
- TAB failed to pay unemployment tax for 2018
- TAB failed to timely file W-2 Statements for the tax period ending December 31, 2015
- Keate filed individual income tax returns for tax years 2010, 2011, 2013, 2016, 2017, and 2018, but failed to pay the taxes due
- IRS examination determined Keate failed to report Schedule E, interest, and dividend income in both 2010 and 2011
- TAB failed to remit withheld federal income and FICA taxes for eleven quarters between 2010 and 2017
Crucially, Keate admitted he was the responsible person for collecting, accounting for, and paying federal income and FICA taxes withheld from TAB’s employees. He also admitted to directing payment to other creditors ahead of the United States despite knowing about TAB’s unpaid trust fund taxes.
The Presumption of Correctness:
For trust fund taxes (withheld income and FICA taxes), employers must hold these amounts “in trust” for the federal government until paid (Westerman v. United States, 718 F.3d 743). A “responsible person” who “willfully” fails to pay trust fund taxes can be held personally liable. “Willful” means a “voluntary, conscious, and intentional act, such as the payment of other creditors in preference to the United States” (Westerman, 718 F.3d at 748).
The Court's Opinion:
The United States established the presumption of correctness through Forms 4340, IRS Account Transcripts, and employee declarations. Keate and TAB failed to respond to the summary judgment motion or provide any evidence refuting the assessments. Keate’s admissions established both his responsible person status and willfulness in failing to pay trust fund taxes. The court awarded the United States $77,143.93 against TAB (plus statutory interest and additions) and $85,931.59 against Keate personally (plus statutory interest and additions).
Tax Practitioner Planning:
- Trust fund taxes create personal liability: The case demonstrates how a business owner’s failure to remit withheld taxes can lead to substantial personal liability through trust fund recovery penalties.
- Documentation establishes presumption: The IRS relied on Forms 4340 and Account Transcripts to establish the presumption of correctness. Without contradictory evidence, these documents alone can support judgment.
- Paying other creditors is “willful”: Keate’s admission that he paid other creditors while knowing trust fund taxes remained unpaid established willfulness
The Keate case serves as a stark reminder that the responsibility for trust fund taxes cannot be avoided through non-payment or non-participation in legal proceedings. When advising clients facing cash flow challenges, practitioners should emphasize that employment tax obligations must take priority over other creditors, and that proper documentation and timely response to IRS proceedings are essential for mitigating potential personal liability.