Michael Sardar wrote an article for The CPA Journal with Daniel Kang titled “The Scope of Personal Liability for Trust Fund Tax in the State of New York.”
In the article, Michael and Daniel discuss how federal and state tax authorities may hold “responsible persons” personally liable for the failure to collect or remit trust fund taxes and detail specifically the laws of New York state regarding failure to pay trust fund taxes. In the article, trust fund taxes refer to “tax that is collected and accounted for by a third party, usually a business, which is then responsible for remitting the collected amounts to the appropriate taxing authority.” Typically, these third parties collect sales and/or payroll taxes for a business.
The article explains that “Because the person or business collecting the tax for the government is generally allowed to hold the tax for some period of time before remitting the funds to the government, opportunities for impropriety arise. Similarly, the party required to collect the tax may choose to fail to do so, sometimes as an accommodation to customers or employees. For these reasons, trust fund taxes, both at the federal and state level, are often coupled with laws and rules that impose personal liability for the tax upon those who are deemed responsible for collecting and remitting the tax. Therefore, even those who operate businesses through limited liability vehicles, such as corporations and other limited liability entities (i.e., LLCs, LLPs), can find themselves personally liable for trust fund taxes, with the liability shield generally afforded to individuals who own and operate such entities inapplicable.”
Michael and Daniel note that New York state has adopted the federal standard for determining “willfulness” in failure to withhold or remit trust fund taxes. As they explain, “the bar to establish a willful failure is not high. Mere knowledge of the failure to pay and subsequent inaction may be sufficient for New York to establish that an individual willfully failed to pay the tax.”
In addition to adhering to the federal standard for willfulness, in some cases, New York’s standard for personal liability may also include non-willful failure to pay trust fund tax. For example, New York’s test for personal liability with respect to sales tax “does not require that the individual acted willfully. Thus, in New York, a responsible person can be held liable for sales tax liabilities, whether the failure to pay the tax was willful or not.”
Michael and Daniel warn that, because New York takes such a wide view of personal liability in regards to the failure to collect or remit trust fund taxes, “anyone with actual or apparent authority over a business’s finances must remain vigilant, as even inadvertent inaction or unexercised powers can result in significant personal exposure under the state’s trust fund tax laws.”
Read the complete article here.
About Michael
Michael has extensive experience on a wide range of tax controversy and white-collar criminal defense matters, and he represents clients in all stages of civil and criminal tax controversies before the IRS, state tax authorities, the Department of Justice, and local prosecutors. Additionally, Michael represents clients in gift and estate tax audits, where he is called upon to assist taxpayers in challenging the IRS’s valuation of gifts and bequests and/or the includability of certain transfers.
