|Who is a responsible person?
Whether one is a responsible person must be determined on a case by case basis. Factors to be analyzed include: authorization to sign a business’s checks, ability to hire and fire employees, management of day-to-day business activities, the degree of responsibility for the maintenance of the business’s books, authorization to sign tax returns, and ownership of the business’s stock. Further, in some states responsible person liability can apply without any showing of the person’s willfulness or intention to shortchange the state on its taxes. Even in states where a showing of willfulness is required, it can be made merely by showing that the business paid other liabilities while the responsible person knew or should have known that the taxes were owed. No showing of bad faith is required.
What is the potential tax exposure?
Once one is determined to be a responsible person, he or she can be held liable for the business’s taxes, sometimes without having an opportunity to challenge the amount of the alleged tax liability. In addition, the liability is not extinguished even if the business goes out of existence. Also, a business’s failure to collect sales and use taxes on its taxable sales can cause a responsible person to be liable for a business’s uncollected taxes as well as taxes that were collected but not remitted.
Managing responsible person liability requires, first and foremost, establishing good internal controls for the collection and remittance of taxes. In addition, showing that some sales are nontaxable should lead to a direct reduction in the amount of responsible person liability. Thus, for example, the purchasers might be exempt from tax, the type of goods sold may qualify for an exemption, or the sales might be properly characterized as a nontaxable sale of a service or intangible property. Assistance of a state tax professional can help to identify potentially nontaxable sales and can establish, to the state’s satisfaction, that no tax is owed on such sales.
Finally, if a business determines on its own that it has or might have a liability for uncollected taxes, it often is possible to negotiate an arrangement with the relevant state and local tax jurisdictions excusing liability for some back years’ taxes, as well as excusing otherwise applicable penalties. Such an agreement benefits both a business and its responsible persons. Negotiations for such an agreement should be conducted by a tax professional without disclosing the taxpayer’s identity.
This Alert provides an introduction to responsible person liability for certain American state and local taxes. For further information and assistance with state and local tax issues anywhere in the United States, please contact David A. Fruchtman at 04-629-0520 or