- Personal Responsibility for Unpaid Company Taxes
- February 3, 2014 | Author: Timothy Spencer
- Law Firm: Weltman, Weinberg & Reis Co., L.P.A. - Brooklyn Heights Office
The reality of becoming a company partner, officer, or executive is for most entrepreneurs an exhilarating dream-come-true. While momentously positive, the ascension also comes with a variety of very serious risks, and one of those risks has the potential to affect the high-level entrepreneur in his or her own personal world. For many individuals occupying significant financial roles within a company, the threat of personal liability for the company's nonpayment of company taxes is very real as both federal and state laws exist that could hold an individual responsible for the infractions committed by the company.
Individual Liability for Corporate Tax Mishaps
That said, understand that not all individuals—even at the executive level—are potentially liable for unpaid company debts, notably taxes. For an individual to be held personally liable for unpaid company taxes, that person must be a "responsible party."1 Unfortunately for a "responsible party," the Internal Revenue Service fails to define the phrase in its code.2 Typically, though, "the types of individuals who are deemed 'responsible persons' for purposes of tax withholding and payment are corporate officers or employees whose job description includes managing and paying taxes on behalf of the company."3 On the state level, what constitutes a responsible party depends upon the state's definition of the phrase. A responsible party may be held liable for both state and municipal taxes, depending on the language of the governing statute.4
Some states consider only the title of the individual when construing whether or not that person is a responsible party for purposes of holding them personally liable for unpaid company taxes. For example, "Maryland statutes extend the liability for Maryland sales and use taxes to 'any president, vice president or treasurer.'"5 Ohio is another state utilizing a title-based and ownership based liability system to impose personal liability on a company employee. In Ohio, "officers of a corporation who own, collectively or individually, more than a 50% interest in the corporation are liable for Ohio withholding payments and sales tax if the corporation failed to file withholding reports or sales tax returns or failed to remit payment with a filed report or return."6 Another method for determining whether an individual qualifies as a responsible party looks at the role, irrespective of title or ownership, of the individual within the company.
For some states, an officer or employee could be held liable for the company's unpaid taxes if the individual's responsibility includes or concerns payment of those company taxes. In those states, the operative question is whether the individual "had a duty" or was "under a duty" to act for the company in complying with its tax payment obligations.7 Moreover, "[w]hether an individual is under a duty to act may be a fact-intensive inquiry and may involve the question of whether the person had knowledge of, or intent to evade, the tax liability."8 While not an exact list, one tax court analyzed the following nine factors to determine whether a person was under a duty to act: "(1) the content of the corporate bylaws; (2) the status as an officer and/or stockholder; (3) authority to sign checks and actual exercise of this authority; (4) authority to hire and fire employees and actual exercise of that authority; (5) day-to-day involvement in the business or responsibility for management; (6)responsibility to prepare and/or sign tax returns; (7) power to control payment of corporate creditors and taxes; (8) knowledge of the failure to remit taxes when due; and (9) derivation of substantial income or benefits from the corporation."9
Determining whether an individual may actually be liable for unpaid company taxes as a responsible party may depend upon the individual's position, responsibilities, or, potentially, an analysis of both. After determining the laws under which the situation is governed, a fact-driven analysis must be done in reaching a conclusion on this point. When an individual does qualify as a responsible party, the consequences for failing to pay company taxes can be severe for the individual.
Company Penalties Assessable to Responsible Party for Unpaid Taxes
When an individual is deemed a responsible party for a company that failed to pay owed taxes, the penalties assessable to the company for failing to pay those taxes are equally assessable to the responsible party. What penalties a responsible party may face depend upon whether the withheld taxes were federal or state and, if state-based, in what state the company failed to pay applicable taxes.
At a federal level, a responsible party may potentially pay 100% of the tax not withheld and/or paid over if the responsible party willfully fails to withhold or pay over necessary taxes to the government. Known as the trust fund recovery penalty, the IRS's collection device enables the agency to collect all due taxes from the responsible party.10 Once assessed, if the penalty goes unpaid, the IRS may utilize any of its available means to collect the amount—attachments, property levies, and so forth.
At the state level, responsible parties may face varying penalties as well as criminal penalties for responsible parties who knowingly fail to collect and remit a company's taxes to the state. In Virginia, for example, "a willful failure to remit sales or withholding tax could result in an individual being found guilty of a misdemeanor."11 Other states—such as Indiana—increase the severity of the punishment and make a knowing failure to remit company taxes a felony.12 Moreover, some states allow for each individual responsible party to be wholly liable for the assessed penalties or for the entire penalty to be split in any way amongst all responsible parties.13
The government, whether federal state or local, allows for personal liability on obligations arising out of unpaid company taxes if the individual can be construed under applicable law as a responsible party. When an individual is deemed a responsible party under relevant law, that individual can be wholly responsible—along with other responsible parties in the company—for any penalty levied on the company. Those individuals in key positions—that is, those dealing with managing the company or handling the company's tax responsibilities—must be aware of this potential risk and ensure proper compliance with tax laws so that they do not find themselves holding a potential tax penalty bill on behalf of the company.
1 Stephen J. Dunn, Officer's Personal Liability for Their Company's Unpaid Taxes, Forbes Magazine, http://www.forbes.com/sites/stephendunn/2011/11/13/officers-personal-liability-for-their-companys-unpaid-taxes/2/ (November 13, 2011).
2 Internal Revenue Code Section 6672.
4 Alabama, for instance, allows for personal liability on unpaid municipal taxes. See Code of Ala. § 40-29-72 and 73. See also Cal. Rev. & Tax Code § 6829.
5 Mitchell A. Newmark and Richard C. Call, Individual Liability for Company Taxes, Morrison & Foerster LLP, Association of Corporate Counsel, http://www.lexology.com/library/detail.aspx?g=0746b72a-a18a-413a-9971-a0e90bb8d2d2 (last edited January 17, 2012).
11 Newmark, supra Note 4.