Navigating Personal Liability for Business Taxes: Lessons From a Recent Court Case
In the complex world of tax law, it is important for business owners and entrepreneurs to understand the nuances of personal liability for business taxes. Recent court cases have highlighted significant lessons and underscored the importance of compliance and knowledge of tax regulations.
When can individuals find themselves personally liable for business tax obligations?
Personal liability occurs when taxing authorities hold individuals liable, not just the business entity, for certain business taxes. This situation often occurs when those responsible for collecting, accounting for, and paying the business's taxes fail to do so according to the responsible person test. Through the trust fund recovery penalty, the IRS can hold those responsible individuals financially liable for the unpaid taxes. As such, it is important for business leaders to know their role and responsibilities to reduce the risk of personal liability.
How does the government use the responsible person test?
The case of Richard W. York v. United States of America illustrates how a business leader can be deemed personally liable for the business’s failure to pay certain taxes through the responsible person test. In this instance, the courts found a Chief Financial Officer (CFO) personally liable for unpaid payroll taxes, despite the fact that payroll was handled by a CPA with check-singing authority. The court reasoned that the CFO, as a responsible person, had failed to collect and pay the tax. Even though the CFO’s job description stated the CPA oversaw payroll and related matters, the court ultimately did not find this argument to be enough to overcome his responsibilities.
This case serves as a reminder for business leaders: regardless of your job title, you must be vigilant and informed about your tax responsibilities to avoid personal liability. Understanding the depth of personal involvement and the scope of responsibility within a business's tax obligations is not only wise but also a legal necessity.
Work With a Tax Lawyer to Navigate Your Tax Obligations Within a Business
Understanding the scope of your tax responsibilities is crucial to avoid being held personally liable for a business’s unpaid taxes, as underscored by the case above. At Kundra & Associates, our goal is to keep you informed and prepared. With a reach that extends across Maryland, Virginia, Washington, D.C., and internationally, our exclusive focus in IRS tax controversy and employment tax law provides you with the insights and support needed to successfully navigate the responsibilities of your employment tax obligations. For further discussion on how to ensure compliance and protect yourself against similar risks, reach out to us for a consultation!