This article examines the recent Ninth Circuit Court of Appeals decision in Kristopher Dreyer v. United States of America, No. 24-906 (9th Cir. Mar. 28, 2025), offering a detailed analysis relevant to CPAs advising clients on trust fund recovery penalty (TFRP) matters. This case underscores the stringent standards for demonstrating a lack of willfulness in failing to pay over employee withholding taxes.

Background and Facts

Kristopher Dreyer served as a board member and chairperson of Riverside Christian School (RCS) during the last quarter of 2017 and the first two quarters of 2018. During this period, RCS failed to remit its trust fund taxes to the Internal Revenue Service (IRS). Trust fund taxes encompass income taxes, social security taxes, and Medicare taxes that an employer withholds from employee wages and is obligated to pay to the IRS on a quarterly basis (citing 26 U.S.C. §§ 3102(a), 3402(a), § 7501(a)).

In December 2021, the IRS determined Dreyer to be a "responsible person" under 26 U.S.C. § 6672(a) and assessed penalties against him personally for the unpaid trust fund taxes, including interest and other statutory additions. Dreyer paid a portion of the assessed amount and subsequently filed suit in district court seeking a refund. The United States countered with a claim for the remaining unpaid balance. Following a bench trial, the district court ruled in favor of the United States, awarding $187,900.12 plus interest and statutory additions. Dreyer appealed this decision to the Ninth Circuit, specifically contesting the district court’s finding that his failure to pay the trust fund taxes was "willful".

Taxpayer’s Request for Relief

On appeal, Dreyer’s sole contention was that the district court erred in concluding that his failure to pay the trust fund taxes was willful. He argued that he lacked the requisite willfulness because he believed the taxes were being paid.

Court’s Analysis of the Law

The Ninth Circuit outlined the legal framework for assessing TFRPs under 26 U.S.C. § 6672. The court cited Matter of York, 78 F.4th 1074, 1092 (9th Cir. 2023) (quoting Purcell v. United States, 1 F.3d 932, 936 (9th Cir. 1993) and § 6672(a)), reiterating the three criteria for imposing the penalty:

The individual qualifies as a "responsible person".
The individual "fail[ed] to collect" or "account for and pay over such tax".
The individual acted willfully in doing so.

The appeal focused exclusively on the third element: willfulness. The Ninth Circuit then defined "willfulness" in the context of § 6672, citing its prior precedent in Matter of York, 78 F.4th at 1094–95 (quoting Purcell, 1 F.3d at 938): "’a voluntary, conscious and intentional act to prefer other creditors over the United States.’". Importantly, the court emphasized that "’[a]n intent to defraud the Government or other bad motive need not be proven’" (quoting Rykoff v. United States, 40 F.3d 305, 307 (9th Cir. 1994)). Furthermore, the court stated that "’[f]or nonpayment to be willful there must be either knowledge of nonpayment or reckless disregard of whether the payments were being made’" (quoting Teel v. United States, 529 F.2d 903, 905 (9th Cir. 1976)).

Regarding the standard of review, the Ninth Circuit noted that it reviews the district court’s findings of fact for clear error and its legal conclusions de novo (citing Price v. U.S. Navy, 39 F.3d 1011, 1021 (9th Cir. 1994)). The court explained that clear error review is deferential, requiring a "‘definite and firm conviction that a mistake has been made’" (quoting Husain v. Olympic Airways, 316 F.3d 829, 835 (9th Cir. 2002), aff’d, 540 U.S. 644 (2004) and Easley v. Cromartie, 532 U.S. 234, 242 (2001)).

Application of the Law to the Facts

The district court found that Dreyer had actual knowledge—or at least recklessly disregarded—that the trust fund taxes were unpaid. The Ninth Circuit affirmed this finding, highlighting several key pieces of evidence:

Email Communication: In February 2018, Dreyer received three emails from the school’s business manager, Gary Carroll, explicitly stating that the IRS was requesting the taxes, the outstanding amounts, and that checks intended for tax payments had been rejected due to insufficient funds in the school’s Citizens Bank account. Dreyer responded by stating the taxes would need to be paid "directly," not from the overdrawn Citizens Bank account. Notably, the only other available account, at Union Bank, was solely controlled by Dreyer. The court found no clear error in the district court’s factual findings regarding these communications.
Dreyer’s Shifting Explanations: Dreyer initially did not mention instructing Carroll or the chief financial officer, Michael Nolan, to pay the taxes when filing for a refund with the IRS. While Dreyer later claimed he gave these instructions in February 2018, he failed to produce any corroborating email or evidence despite the admission of other email correspondence from that period concerning the taxes.
Contradictory Testimony: Both Nolan and Carroll provided testimony that directly contradicted Dreyer’s claims. Nolan testified that Dreyer never directed him to pay the outstanding payroll taxes. Carroll refuted Dreyer’s assertion that Carroll understood Dreyer’s instruction to pay the IRS directly, stating he lacked access to the Union Bank account and the Citizens Bank account had insufficient funds. Furthermore, Carroll denied ever telling Dreyer that all taxes were paid or being paid on time.
Inconsistent Timeline: Dreyer’s claim that he believed the taxes were paid after RCS received a donation in March 2018 was deemed inconsistent. Carroll, the business manager until the end of February 2018, could not have reported on tax payments made with funds received after his departure. Moreover, Dreyer acknowledged that a significant portion of the donation was used for land acquisition and development, suggesting a preference for other creditors over the IRS.
Unreliable Financial Statements: Dreyer’s argument that he relied on financial statements not showing the tax debt was undermined by his admission that those same statements also omitted other known debts of RCS.

Based on this evidence, the Ninth Circuit concluded that the district court’s rejection of Dreyer’s explanations for believing the taxes were paid was well-supported by the record. The court reiterated the standard from Matter of York, 78 F.4th at 1093, stating that to defeat the IRS’s assessment, Dreyer had to demonstrate that no reasonable trier of fact could find in the IRS’s favor on at least one element of the penalty. The Ninth Circuit found that Dreyer failed to meet this burden with respect to the willfulness element.

Court’s Conclusions

The Ninth Circuit affirmed the district court’s judgment, concluding that the district court did not clearly err in finding that Dreyer had actual knowledge—or at least recklessly disregarded—that the trust fund taxes were unpaid, thus satisfying the willfulness requirement under § 6672.

Implications for CPAs

This case serves as a critical reminder for CPAs advising clients on TFRP issues. Key takeaways include:

Knowledge is Key: Actual knowledge of unpaid trust fund taxes, coupled with the use of funds to pay other creditors, clearly establishes willfulness.
Reckless Disregard: Even without explicit knowledge, reckless disregard for whether trust fund taxes are being paid can satisfy the willfulness standard. This can be demonstrated by a failure to investigate or address clear indications of nonpayment.
Burden of Proof: Taxpayers bear a significant burden in challenging TFRP assessments, needing to demonstrate that no reasonable fact-finder could conclude they were responsible or acted willfully.
Contemporaneous Documentation: This case highlights the importance of contemporaneous documentation. Dreyer’s lack of supporting evidence for his claims, especially in light of contradictory email evidence and testimony, proved detrimental to his appeal. CPAs should advise clients in positions of responsibility to maintain thorough records of communications and actions related to tax obligations.
Preference of Creditors: The intentional decision to pay other creditors while aware of outstanding trust fund tax liabilities is a hallmark of willfulness.

By understanding the nuances of willfulness as interpreted by the courts, CPAs can better advise clients on their responsibilities regarding trust fund taxes and the potential consequences of noncompliance. This case underscores the strict application of § 6672 and the challenges taxpayers face in disputing findings of willfulness when evidence suggests knowledge or reckless disregard of unpaid tax obligations coupled with the payment of other creditors.

Prepared with the assistance of NotebookLM.

The full text of the opinion can be read below:

Kristopher Dreyer v. United States of America, No. 24-906 (9th Cir. Mar. 28, 2025)