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Are you liable?

Before you accept that great new job . . . .

Bill and Tina were hired as CEO and CFO of a C corp. They soon discovered that the business already was delinquent on employment taxes for several quarters. Bill and Tina were given check-signing authority by the board. The business did not fare well, so it did not pay the pre-existing employment tax liability and accumulated new unpaid employment tax liabilities. After a couple of years, Bill and Tina were fired. But the IRS sought payment of the employment tax liabilities personally from both Bill and Tina.

For the IRS. Bill and Tina were responsible persons. It does not matter that they were not aware of the unpaid employment taxes when first hired or that some of the liability was incurred before they joined the firm. Once responsible persons become aware of the liability, they are obligated to use corporate funds to pay current and past employment taxes before paying any other liabilities. The only exception is when funds are legally restricted to pay another obligation.

Bill and Tina also argued that the board of directors restricted their authority by directing that priority be given to other expenses or that the taxes not be paid. To support that claim, the taxpayers would need a board resolution or similar document that shows a majority of directors specifically restricted their authority.

They further claimed that one or two directors said they thought the taxes should not be paid ahead of other expenses. But the board as a whole did not officially adopt this view as a policy, so the taxpayers still had authority to pay the taxes if they chose to.

Nor did it matter that the taxpayers were outranked by those at the corporation who did not want the taxes paid. Both had check-writing authority and significant control over how funds were spent, so they were responsible for the tax liabilities. A responsible person does not need absolute control over financial decisions to be personally liable for unpaid employment taxes [emphasis added]. [Schiffmann v. United States, 1st Cir., No. 14-2179]

In other words, if the IRS deems you to be a “responsible person,” claiming that “my boss told me to pay his country club dues first” is not a lawful excuse.