Boo! — Personal Liability Exposure for Your Business’ State Taxes

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Halloween is just around the corner, and if you thought this year could not get any scarier, think again. Failure to remit your business’ taxes to the state may result in a personal visit by the Office of the Texas Comptroller or Texas Attorney General. Several provisions of the Texas Tax Code impose personal liability on individuals associated with a business. Those individuals are typically (although not always) people with authority and power to make decisions related to a business’ operations, finances, and/or tax obligations. The following is a list of key tax provisions demanding personal liability:

            Generally

(a) Any person who receives or collects a tax or any money represented to be a tax from another person holds the amount so collected in trust for the benefit of the state and is liable to the state for the full amount collected plus any accrued penalties and interest on the amount collected. . . .

(b) With respect to tax or other money subject to the provisions of Subsection (a) or (a-2), an individual who controls or supervises the collection of tax or money from another person, or an individual who controls or supervises the accounting for and paying over of the tax or money, and who wilfully fails to pay or cause to be paid the tax or money is liable as a responsible individual for an amount equal to the tax or money not paid or caused to be paid. The liability imposed by this subsection is in addition to any other penalty provided by law. The dissolution of a corporation, association, limited liability company, or partnership does not affect a responsible individual’s liability under this subsection.[1]

            Franchise Taxes

(a) If the corporate privileges of a corporation are forfeited for the failure to file a report or pay a tax or penalty, each director or officer of the corporation is liable for each debt of the corporation that is created or incurred in this state after the date on which the report, tax, or penalty is due and before the corporate privileges are revived. The liability includes liability for any tax or penalty imposed by this chapter on the corporation that becomes due and payable after the date of the forfeiture.[2]

            Fraudulent Tax Evasion

(a) An officer, manager, or director of a corporation, association, or limited liability company, a partner of a general partnership, or a managing general partner of a limited partnership or limited liability partnership who, as an officer, manager, director, or partner, took an action or participated in a fraudulent scheme or fraudulent plan to evade the payment of taxes due under Title 2 or 31 is personally liable for the taxes and any penalty and interest due. The personal liability of an individual includes liability for the additional 50 percent fraud penalty provided by Section 111.061(b). The comptroller shall assess individuals liable under this section in the same manner as other persons or entities may be assessed under this chapter.[3]

Per the statutes outlined above, any person who “receives or collects a tax” holds the amount “in trust for the benefit of the state.”[4] Thus, the state has the ultimate claim to the taxes/money collected and in the possession of a business. In Texas, businesses may collect many types of taxes: sales and use taxes, mixed beverage taxes, excise taxes, hotel occupancy taxes, etc.

Standards for Personal Liability

The Texas standards of personal liability for failure to collect and pay over taxes are very similar to the federal standards. Section 6672 of the Internal Revenue Code imposes a “trust fund recovery penalty” equal to the total amount of tax evaded, or not collected, or not accounted for and paid over, on any person who is required to collect, account for, and pay over any tax who willfully fails to collect such tax, account for and pay over such tax, or willfully attempts to evade such tax.[5] For simplicity, a person is liable is he or she is (1) a responsible person, and (2) a person who willfully failed to collect, account for, or pay over the taxes at issue.

In Texas, the state uses very similar language in determining personal liability. An individual is “responsible” if he or she “controls or supervises the collection of tax or money from another person, or . . . controls or supervises the accounting for and paying over of the tax or money.”[6] Additionally, such individual must also “wilfully fail to pay or cause to be paid the tax or money.”[7] An individual who satisfies both standards will be liable for an amount equal to the tax not paid in addition to any other penalties available.

A “responsible” person, as noted above, is not necessarily an officer or director of a company or business. As the Texas Tax Code points out, a “responsible individual” includes an officer, manager, director, or employee of a corporation, association, or limited liability company or a member of a partnership, who, as an officer, manager, director, employee, or member, is under a duty to perform an act with respect to the collection, accounting, or payment of a tax or money.[8]

Understandably, the Texas Comptroller’s will initially set its sights on the directors or officers of a business. However, in many cases, the directors or officers are unaware of any tax issues. It is generally after an initial investigation that the director/officer discovers that another officer or employee of the business (whose job duties include collecting, reporting, and/or remitting taxes to the state) failed to do his or her job and/or embezzled the tax proceeds.

This, of course, is an issue to be raised relative to the second standard of “willfulness.” The Texas Comptroller has the burden of proof to establish that a responsible person acted willfully in failing to collect, account for, or remit certain state taxes.[9] Additionally, the term “wilfully” in Section 111.016(b) has been defined to encompass “both knowledge and reckless disregard.”[10] In fact, certain courts have gone so far as to adopt Section 6672’s construction of the term “willfully” and apply it to Section 111.016(b).[11] As a result, if the Texas Comptroller can prove that an individual knew that certain state taxes were due and used the money to pay others (employees, creditors, suppliers, etc.), then the “willfulness” standard is generally satisfied.

Conclusion

Generally, an individual will be personally liable for outstanding taxes due to the Texas Comptroller if he or she is responsible and acted willfully. As noted above, the terms “responsible” and “wilfully” are rich in meaning. The facts and circumstances of each individual’s case matters. Disproving either standard can avoid a personal assessment of a business’ state taxes.

In this business environment, companies have found it difficult to breakeven; some businesses have even failed. Notably, the fact that a business failed/dissolved does not avoid this potential nightmare for individuals. Section 111.016(a) plainly states that a failed business’ taxes may come back to haunt you personally—the dissolution of a business “does not affect a responsible individual’s liability.” Consequently, you should be careful with (1) who you work for, (2) who works for you, and (3) who you go into business with. Failure to properly vet the people associated with your business and the processes for collecting, reporting, and remitting state taxes could result in personal liabilities in addition to harsh penalties for fraudulent tax evasion.

[1] Tex. Tax Code Ann. § 111.016(a), (b).

[2] Tex. Tax Code Ann. § 171.255(a).

[3] Tex. Tax Code Ann. § 111.0611(a).

[4] Tex. Tax Code Ann. § 111.016(a).

[5] I.R.C. § 6672(a).

[6] Tex. Tax Code Ann. § 111.016(b).

[7] Id.

[8] Tex. Tax Code Ann. § 111.016(d) (emphasis added).

[9] See State v. Crawford, 262 S.W.3d 532, 535 (Tex. App.—Austin 2008).

[10] Id.

[11] See Crawford, 262 S.W.3d at 538; see also In re Texas Pig Stands, Inc., 610 F.3d 937, 942 (5th Cir. 2010) (citing Barnett v. I.R.S., 988 F.2d 1449, 1458 (5th Cir. 1993) (“Willfulness . . . requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent.”).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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