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Personal Liability for Certain Corporate Tax Debts

Some business owners incorporate, or form an LLC, in order to gain credibility for their business ventures. The real reason for forming a corporation (or LLC), however, is the separation of personal assets from business debts, and business assets from personal debts. This concept is often called the “corporate veil”. But certain activities can pierce the corporate veil and subject the owners and managers of the business to personal liability for debts of the corporation/LLC.

When Corporations Skip Payroll Tax Payments

An unfortunate fact of life for many business owners and managers is the occasional cash-flow crunch. Prioritizing which bills will get paid and which will get pushed off to a later date can be a difficult and stressful process. Delinquent payments to vendors can strangle the business’ supply chain. Late payments to the bank will trigger a default on the loan and can result in business disruptions or the forced sale of assets.

The IRS can be said to be many things, but “quick” is not usually one of them. With the IRS taking months, or even years, to initiate meaningful collection measures, corporate decision makers may be tempted to cheat their way through lean cash times by skipping payroll tax remittances, with the intent of catching up when times are better. The thought is that missed payments to vendors or banks will have immediate consequences but favoring those creditors at the expense of the Internal Revenue Service will allow the business to live another day and regain prosperity. This is a very dangerous strategy.

Consequences of Neglecting Liability

Neglecting any corporate liability has the potential to harm or even destroy a business. But failing to remit federal payroll or excise taxes has the potential to both harm the business and pierce the corporate veil, thereby converting corporate financial problems into personal financial nightmares for the owners, officers or other responsible individuals.

Section 6672 of the Internal Revenue Code imposes upon all “responsible persons”, a penalty equal to 100% of payroll taxes withheld from employees but not remitted to the IRS. This penalty remains a debt of the responsible person even if the business files for Bankruptcy protection, and the debt is generally not dischargeable in a personal bankruptcy case filed by the responsible person.

This is a financial problem with a very bleak outlook in most cases. The bottom line is that anyone who could be found to be a “responsible person” under Section 6672 should take precautions to make sure they are properly insulated from this type of liability if there is any chance the business is failing to remit federal payroll or excise taxes.

Determining a "Responsible Person" for Tax Debts

It should be noted that not only business owners are at risk under this tax rule. There are a variety of fact based tests to determine if someone is a “responsible person”, as that term is defined in the Tax Code.

Some strong indications that someone is a “responsible person” are, among others:

  1. Status as an officer of the company
  2. Ownership in the business
  3. Authority to sign checks or tax returns
  4. Authority to hire and fire the persons responsible for signing checks or tax returns
  5. Actual signatures on tax returns. It is not necessary to meet all of these requirements to be found liable under Section 6672

 It is a facts and circumstances test based on any combination of these, and other, criteria.

If you would like to talk to a Penzien & McBride attorney about your potential exposure to responsible person assessments under IRC §6672, or other corporate or business matters, please contact us at (586) 690-4400 or visit our contact page.

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