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Mitigating Officer Liability For Unpaid State Taxes


In a business climate of budget cuts, redundancies and widespread reporting of corporate losses, corporate officers have become subject to criticism, with many commentators demanding that executives be held accountable for their companies' actions. Most jurisdictions impose some level of direct personal liability on corporate officers and others responsible for some of their companies' unpaid state tax obligations.

Taxand US looks at the scope of that state authority, presents their perspective on the relationship between state corporate officer liability rules and the federal bankruptcy code, as well as discussing mitigating the risk of personal liability.

States can and do impose personal liability on officers and directors for certain unpaid corporate tax liabilities, penalties and interest. The most common types of taxes for which personal liability arises are so-called "trust fund taxes," such as state sales taxes, income tax withholding and similar obligations. Such taxes are collected from purchasers or withheld from employees on the state's behalf, then held in trust by the company until later remitted to the state.

In certain instances, personal liability can also arise in the context of non-trust fund taxes. States' definitions of persons responsible for payment of their company's taxes tend to be expansive, frequently extending liability beyond the tax department. Often, personal liability for a company's unpaid state taxes arises when two conditions are met. First, the individual must be a person "responsible" for collecting and remitting the tax at issue. Second, the individual must act "willfully" in failing to pay over taxes.

Taxand's Take

While states are not "out to get" corporate officers as a matter of course, they most certainly want to be paid the tax liabilities they believe are owed. To effect that goal, states will do everything in their power, whether payment comes from the business itself or from corporate officers or other responsible individuals.

Corporate officers and other employees who could be deemed responsible persons should be acutely aware that their company's failure to pay certain taxes could directly expose them to personal liability for unpaid taxes.

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Your Taxand contact for further queries is:
Donald Roveto
T. +1 212 763 9632

Taxand's Take Author