When an individual or group decides to open a new business, it’s a very exciting time. The possibilities are limitless! Daydreams of swimming through dollar bills like Scrooge McDuck and throwing parties like Jay Gatsby in the Roaring Twenties come to mind. But the reality of signing the dotted lines for creating a new company must muscle its way through those daydreams and sink into your brain until the depth of those responsibilities takes over.

As the individual or individuals at the helm of the new business, even if the business is registered as a Corporation, the IRS and State tax agencies can pierce the bubble around the business and hold you personally accountable for some of its tax debts. This practice comes into consideration for what is known as “trust taxes,” dubbed as such because you collect the money from someone else to hold “in trust” to turn over to the Federal or State Governments. Most often, this is for payroll taxes you withhold from your employee’s paycheck or sales tax you collect from the general public.

During Covid and in the quarters since, it was the common practice of the IRS and States to gently notify the business of the taxes owed and politely ask for repayment. When a trust tax was accrued, personal assessments were not sought. However, the game is now changing as the entire country recovers from the pandemic and returns to a semblance of “normal.” The IRS has announced that the hold placed on personal assessments for trust taxes is lifted, and most States are following suit.

What exposes a person to being held responsible for a “trust” tax? The list is surprisingly short! First, it starts with your position within the organization. If you are an Owner, a C-level professional within the business, a Director or Manager, an Accountant or Bookkeeper servicing the business, a Board Member, Shareholder, or Trustee, you are automatically considered in the list of individuals that are potentially responsible. Holding one of those titles creates exposure, but more information is considered before assessing personal responsibility.

With the IRS, and typically with the States, you have to be involved in deciding how the business uses the collected funds. With the IRS, the key phrases are “willful” and “responsible.” For example, if you review the business’ available funds on a daily basis and direct your assistant which bills to pay over others and a tax debt is accrued, you would be considered “willful” and “responsible” for diverting the funds away from the tax obligation.

And while withholding taxes from employee paychecks and failing to turn the funds over to the IRS and State is a problem, the States often view sales tax payments as an even greater “sin” as the business collects that money from the general public to turn over to the State. I have heard this referenced by State Agents as “one step away from theft.” Understanding the psychological basis for the level of aggression often helps keep a good perspective when facing this type of tax debt.

It's important to note that during the process of determining personal responsibility for a trust tax, the business and its Power of Attorneys on record will be notified of the investigation. Often, the IRS Revenue Officers and State Agents assigned to collect on the account and conduct the investigation will issue a request for copies of documentation to help determine who could be responsible. This list could include copies of canceled checks, copies of tax returns, copies of service contracts, work schedules, etc. What the Officers and Agents are looking for is who signed checks, who signed the returns, who committed to the work performed, who was in the office on the days the tax payments were due, etc. They are assembling pieces of the puzzle to identify who could have been the responsible person calling the shots that caused the tax debt to accrue.

Once the IRS or State decides whom to hold personally liable for the trust tax debt, what happens next? The ones identified as personally responsible (and it can be more than one individual!) will receive a notice of determination from the applicable tax agency, and rights to appeal the decision are given. How much time the individual is given to respond with a challenge to the proposed assessment varies based upon the issuing agency, though most grant 30 days from the date on the notice.

If the individual agrees to the personal responsibility assessment, nothing needs to be done, and the debt is recorded at the end of the challenge period. Once finalized, then the tax agency has two or more options to seek collection of the debt from: the business and the person(s) deemed responsible. And given the amount of taxes not collected over the last two years because of Covid and the amount of monies spent by our Federal and State Governments, we expect the collection tactics to be aggressive.

If you or your client have been exposed to personal assessment for a payroll or sales tax debt owed, call the Golden Lion Tax Solutions team for help. With over 23 years of experience helping hundreds of clients through similar circumstances, we have the first-hand knowledge and expertise needed to mitigate personal exposure whenever possible and swiftly resolve the tax debt situation.

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Your future and your family deserve the right protection. Golden Lion Tax Solutions will be your advisor and confidant throughout the entire journey. We guarantee to offer you or your business best-case solutions for your tax debt. We are by your side every step of the way. Start now and get your life back.

For help with your tax debts, email contactus@goldenliontaxsolutions.com or call 833-LION-TAX (833-546-6829)

Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.