It is not uncommon for financially distressed businesses to get behind on payroll taxes, especially when the company does not have a payroll service that handles the payment of all taxes and automatically deducts the full amount from the company’s bank accounts. Chapter 11 cases often have significant unpaid payroll taxes scheduled as a priority claim, after using the funds to pay other bills to stay afloat.
What happens when a company goes out of business (in or out of bankruptcy) and leaves behind unpaid federal withholding taxes (commpnly known as "trust fund taxes")? The Fourth Circuit addressed that question in an opinion entered Wednesday. See Erwin v. United States, No. 08-1564 (4th Cir. January 13, 2010) (click here for opinion).
- Employers are required to withhold social security and federal excise taxes from employee wages.
- Those withheld funds are held in trust for the United States, and are often referred to as "trust fund taxes."
- Once in the hands of the employer, those funds are held for the exclusive use of the government, not the employer.
- Even if the employer needs the withheld tax money to pay suppliers and vendors to keep the business operating as a going concern, it can’t, because "the government cannot be made an unwilling partner in a floundering business."
- The Internal Revenue Code imposes personal liability for payroll tax on the officers and agents of an employer who are (1) responsible for "the employer’s decisions regarding withholding and payment of the taxes" and (2) who willfully fail to see that the taxes are paid.
You do not have to be an owner, officer or director to be a "responsible person" who has personal liability for these taxes. If you have sufficient control over the company’s payroll, which creditors to pay or not pay, the day-to-day business affairs and who to hire and fire, you could be liable.
Click here to read Mack’s detailed analysis of this opinion and individual liability for taxes.
Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation. For more information, click here.