The United States District Court for The Western District of Virginia recently granted the government a default judgment against a law firm for nearly $220,000, plus interest and penalties, in unpaid federal employment taxes and unemployment taxes. U.S., v. Miller Law Group, P.C., et al.,[1] is a perfect example of one of the worst ways to handle inquiries and assessments from the Internal Revenue Service (“IRS”), ignore them until you die.
Factual and Procedural History
On June 23, 2020, the government commenced a civil action against Miller Law Group, P.C. (“Miller Law Group”) and Larry Lynn Miller (together with Miller Law Group, “Defendants”) and filed an amended complaint shortly thereafter on July 8, 2020 (“Complaint”). The Complaint sought judgment against Miller Law Group for unpaid federal employment and unemployment taxes and injunctive relief. The Defendants were served with process, but neither answered nor otherwise defended the action within the time period permitted by the Federal Rules of Civil Procedure. On August 25, 2020, the Clerk entered default against the Defendants pursuant to Federal Rule of Civil Procedure 55(a), which provides that when a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, the clerk must enter the party’s default. In December 2020, the government filed a motion to dismiss the action for injunctive relief, because the Circuit Court for the City of Charlottesville appointed a receiver of Miller Law Group responsible for terminating its law practice and Larry Miller had passed away. That motion was granted on February 22, 2021, which left only the government’s motion for default judgment.
The case did not provide much in the way of background facts, and those that it did discuss were as alleged in the Complaint. The Complaint alleged that starting in early 2017, Miller Law Group failed to comply with federal employment and unemployment tax obligations and started engaging in “pyramiding,” whereby a business repeatedly withholds taxes from its employees’ wages but did not remit those taxes to the IRS. Assessments from the United States Secretary of the Treasury showed that as of April 20, 2020, Miller Law Group owed $219,496.82 in unpaid federal employment taxes and penalties, plus statutory interest and penalties accruing until paid. Additionally, Miller Law Group disclosed in bankruptcy court filings that it had either received or applied to receive attorney’s fees through distributions from bankruptcy trustees of at least $1,270,000 for its previous representation of clients. The Complaint further alleged that the IRS spent a great deal of time and effort to bring Miller Law Group into compliance and took the following actions in an attempt to do so:
- made tax assessments against Miller Law Group for unpaid federal employment taxes and sent notices and demands for payment;
- recorded federal tax liens against Miller Law Group with respect to those unpaid federal employment taxes;
- levied upon Miller Law Group’s bank accounts;
- met in person with Larry Miller four times to discuss the unpaid taxes;
- spoke to Larry Miller on the phone fourteen times to discuss the unpaid taxes and left additional voicemails on the same topic;
- sent an IRS Letter 1058 eight separate times; and
- delivered an IRS Letter 903 and Notice 931 threatening legal action.
It is unclear from the case exactly what steps the Defendants took to respond to the IRS, however it is clear that those steps were not sufficient to satisfy the IRS. While not discussed in the case, perhaps part of the reason why neither of the Defendants responded to the proceedings could be due to the fact that Miller had his license to practice law suspended for three years effective July 28, 2020, following his suspension to practice in bankruptcy court.[2] According to an August 15, 2020 web article from the Charlottesville, Virginia local newspaper The Daily Progress, shortly after the disciplinary board’s July 28, 2020 decision, the Miller Law Group website was deleted and the phone numbers associated with the business were disconnected.[3] Sadly, according to his obituary, Miller passed away on December 9, 2020.[4]
Brief Discussion of Federal Payroll Tax Responsibilities
Both employers and employees hold the responsibility for collecting and remitting withholding taxes to the IRS. For the most part, the employer withholds these taxes on behalf of their employees, but in cases where an employer does not do this, or where an employee is self-employed, it is the responsibility of the employee to pay these withholding taxes. Generally, an employer’s federal payroll tax responsibilities include withholding from an employee’s compensation for federal income and Federal Insurance Contributions Act (“FICA”) taxes, pay those withholdings to the IRS, and pay its own FICA and Federal Unemployment Tax Act (“FUTA”) taxes to the IRS.[5] FICA taxes consist of the following:
- 2% Social Security tax;
- 45% Medicare tax (the “regular” Medicare tax); and
- Since 2013, a 0.9% Medicare surtax when the employee earns over $200,000.
The employer portion for FICA taxes is the same 6.2% Social Security tax and 1.45% Medicare tax that is required to be withheld for the employee. FUTA taxes are paid from the employer’s funds (not paid by the employee), at a rate of 6% of the total employee wages and salaries. IRS Form 941 (Employer’s Quarterly Federal Tax Return) must be filed quarterly, and Form 940 (Employer’s Annual FUTA Return) must be filed annually to report FUTA taxes. Prior to payment of withheld federal income, Social Security, and Medicare taxes, as well as the employer’s share of FICA and FUTA taxes to the IRS, employers must deposit amounts in a federal depository bank in accordance with governing Treasury Regulations.[6]
Ruling
The Court reviewed the Complaint and the motion for default judgment and its attached exhibits, including the attached IRS Account Transcripts showing Miller Law Group’s unpaid tax liabilities and an accompanying declaration of an IRS revenue officer. The Court, citing Sarubin, also noted that an IRS assessment is “presumed correct” and establishes a prima facie case that the defendant bears the burden of rebutting.[7] Since Miller Law Group failed to respond to any of the pleadings, the Court found that the government had sufficiently demonstrated that Miller Law Group was liable for the unpaid employment and unemployment taxes.
Having concluded that liability was established, the Court only had to determine the relief to which the government was entitled. As stated above, the government sought $219,496.82 in unpaid tax liabilities as of April 20, 2020, plus interest and statutory additions accruing thereafter, and less any credits and payments, as shown in both the IRS Account Transcripts and IRS revenue officer declaration. Accordingly, the Court granted the government’s motion for default judgment against Miller Law Group in the amount of $219,496.82, plus interest and penalties and less any credits and payments.
While not discussed in the case, it should be noted that, in the event the Miller Law Group does not have sufficient funds to pay the judgement, the IRS will probably file a claim for unpaid taxes against Miller’s estate. In the event the estate is also insolvent, such a claim would likely result in the IRS having priority over other claims against the estate.[8] The executor of such an estate must be very careful, because he can be held personally liable for any unpaid taxes of the estate to the extent of the value of other debts paid by the executor over the outstanding priority claims of the IRS.[9] A debt for this purpose includes a distribution of a bequest or a portion of the residuary estate to the named beneficiaries under the decedent’s will or under the law of intestate distribution. Such liability need not have been assessed by the IRS at the time; for example, if a lawyer or accountant working for the estate or an IRS agent informs the executor that there is or may be an assessment for unpaid taxes against the decedent before the subject distribution is made, the knowledge criterion is satisfied. Actual notice is not required, so long as the executor had sufficient notice of the claim that would cause a reasonably prudent person to inquire further.
Conclusion
While it is not clear exactly what actions the Defendants took in response to the IRS’ prior to litigation, they certainly chose what is generally one of the worst possible courses of action available after a proceeding has been filed in court, do absolutely nothing. As evidenced by Federal Rule of Civil Procedure 55(a) and the outcome of the case, failing to plead or otherwise defend the case will result in the court only hearing one side’s arguments. Assuming the responsive side has sufficient evidence, this will almost certainly result in a worst-case outcome for the non-responsive party. Perhaps in this case, Miller’s suspension from the practice of law made him, or the remaining individuals in charge of making decisions for the Miller Law Group, doubt that the firm had enough of an argument against the IRS’s claims, and thus it was not worth the time and effort the file a response (or find and hire another attorney to defend the firm).
Regardless, the Defendants likely could have taken other or additional actions prior to the commencement of the civil suit that would have resulted in a more favorable action. The IRS is usually willing to work with individuals and businesses to come to an agreement that leaves them in a reasonable financial position, and a tax professional is one of the best tools to assist you in reaching these agreements. While audits and tax controversies can be intimidating, hiding your head in the sand, and hoping the IRS goes away is almost never a good option. Clients are strongly encouraged to hire a tax professional as soon as possible to assess the situation and plan the appropriate course of action to minimize business disruption and long-term negative financial impact.
[1] United States v. Miller Law Group PC et al.; No. 3:20-cv-00031.
[2] Virginia State Disciplinary Board, In the Matter of Larry Lynn Miller VSB Docket NO.: 20-000-11860 (July 28, 2020), https://www.vsb.org/docs/Miller-081220.pdf
[3] Tyler Hammel, Two area lawyers have licenses suspended (August 15, 2020), https://dailyprogress.com/news/crime/two-area-lawyers-have-licenses-suspended/article_6777433f-c2a5-5154-bc48-871a623364b3.html.
[4] Hill & Wood Funeral Service, Larry Lynn Miller Obituary, https://www.hillandwood.com/obituaries/Larry–Lynn-Miller?obId=19293664.
[5] 26 U.S.C. §§ 3102, 3111, 3301, and 3402.
[6] 26 U.S.C. §§ 6302 and 6157 and 26 C.F.R. § 31.6302-1.
[7] U.S. v. Sarubin, 507 F.3d 811, 816 (4th Cir. 2007).
[8] 31 U.S.C. § 3713(a)(1)(B).
[9] 31 U.S.C. §§ 3713(b), 6901(b), and 7701(a)(6).
