Many cash-strapped companies fail to deposit its payroll taxes and unemployment tax. Unlike other creditors, Federal and state taxing authorities are not usually knocking at the company’s door demanding payment of money. The company may resolve to pay tax deficiencies later on, when cash is available, yet that day never seems to arrive, and the problem only compounds itself by acting as if it is not there. Eventually, tax collectors will appear and seek to collect the tax, penalties, and interest owed by the company. If immediate payment cannot be effected, the tax collectors may enter into an installment agreement. If payment is not made or an agreement not reached, judgments will be obtained and liens in the company’s property arise in favor of the taxing authorities for the amount of the tax, penalties, and interest due them. The taxing authorities will record notices of their tax liens in the register of deeds’ office of the county where the company is located, disabling the company from selling or mortgaging interests in real property, and impairing the company’s credit. If the company does not cooperate with the taxing authorities, the taxing authorities will seize the property of the company.
The taxing authorities may also seek to assess the company’s taxes due against the company’s “responsible persons”—those who controlled the company’s available cash, and used it to pay debts other than taxes. In the Federal scheme, such an assessment is called a “trust fund recovery penalty.” A misnomer, it consists of Federal income tax and Social Security tax withheld by the company from employees’ wages but not remitted to the Internal Revenue Service. It excludes employer matching Social Security tax. From the time a trust fund recovery penalty is assessed, the IRS has ten years to collect it. A Federal tax lien encumbers all property owned by the responsible person at the time the trust fund recovery penalty is assessed, or acquired by the responsible person during the ensuing ten years. The IRS records notice of the Federal tax lien in the register of deeds’ office of the county of the responsible person’s residence. In addition to disabling the responsible person from selling or mortgaging interests in real property, and impairing the responsible person’s credit, a notice of tax lien recorded against a responsible person may affect his or her ability to secure new employment or obtain credit for other business ventures. A trust fund recovery penalty is also not dischargeable in bankruptcy.
Under Internal Revenue Code Section 7202, anyone required to collect, account for, and pay over to the IRS any tax is guilty of a felony, punishable upon conviction by fine of up to $10,000, or imprisonment of up to five years, or both, for each offense.
New York state has a parallel scheme for holding officers personally liable for their business’ undeposited taxes. There are some things a company can do to protect its principals from personal liability for the company’s taxes:
• Keep spouse out of harm’s way. This should be a no brainer
• Retain competent counsel. A company with tax delinquencies needs to consult competent counsel about the problem. Inappropriate tax assessments may have been made against the company. The company may have grounds for seeking relief from tax penalties which have been assessed against it. The company may have made tax payments for which it has not been given credit. Perhaps the company should be advised to abandon its business entity. Certainly the company should be advised to allocate some of its monies to pay its tax obligations.
• Allocate voluntary payments. Often the best advice counsel can give a company struggling to pay its taxes is to make voluntary payments
• Do not delay without a good defense. A mistake commonly made by a company delinquent in paying its taxes is to avoid tax collection authorities. This is ill-advised, for many reasons. A cooperative working relationship with the taxing authority serves the taxpayer’s interests. There can be no such relationship if the taxpayer is evading the taxing authority. Taxpayer evasiveness will draw the ire of the taxing authority, prompting them to redouble their efforts against the taxpayer, and resolve doubts against the taxpayer.
Lesson to be learned…..DO NOT AVOID PAYMENT OF TAX LIABILITIES…your problems do not go away simply because you want them to.