When the Department of Revenue transitioned trust fund taxes to its “new” integrated computerized tax system last November, it temporarily suspended the issuance of responsible party assessments. In its most recent PA Tax Update, the Department announced that it would be resuming the issuance of responsible party assessments. It is imperative that officers and other persons in control of a business make sure that trust fund taxes (employer withholding taxes and sales taxes collected from customers) are paid when due, even when a business is having financial difficulties, to avoid potential personal liability for such taxes through a responsible party assessment.

A responsible party assessment must be timely appealed even if the business has appealed the underlying tax liability or the recipient may lose the right to contest personal liability for the unpaid taxes. As reflected in decisions recently published in the Board of Finance and Revenue’s decision database, untimely appeals are generally dismissed, even when an individual thinks he or she has a compelling reason for not filing a timely appeal.

Under Pennsylvania law, there are important exceptions to the general rule that officers, employees and owners of a corporation or limited liability company have no personal liability for the business’s unpaid tax liabilities. The Pennsylvania Department of Revenue has statutory authority to collect unremitted sales tax, employer withholding tax and fuel tax from “responsible parties” when those taxes have been collected from customers or withheld from the compensation of employees. See 72 P.S. § 7225; 72 P.S. § 7320; 75 Pa. C.S. § 9014.  The basis for this type of assessment is that the collected taxes constitute a “trust fund” in favor of the Commonwealth. That is, in each of these situations, the business has collected taxes from third parties on behalf of the Commonwealth. The applicable statutes generally provide that the collected, but unpaid, taxes are enforceable against “representatives” of the business that collected the taxes.

When there is an unpaid “trust fund” liability, the Department of Revenue is likely to issue a responsible party assessment against the chief operating and financial officers of the business and possibly against owners and other employees who have been identified on tax filings or registration documents as having responsibility for the reporting of these taxes. It is therefore critical that such persons file the appropriate forms to have their names removed from the records maintained by the Department when they are no longer an officer or owner of a business or otherwise no longer have responsibility for the operation of the business or for tax filings.

Since the Department often has limited information as to which individuals were actually in control of a business’s operations and/or responsible for the remittance of trust fund taxes, assessments are commonly issued against individuals who were not actually “responsible parties,” as that term has been construed by the Pennsylvania courts. For example, the courts have generally restricted personal liability for unpaid trust fund taxes to individuals who actively control the operations of a business. See, e.g., Brown v. Commonwealth, 670 A.2d 1222 (Pa. Cmwlth. 1996).

Individuals who were, in fact, actively engaged in the management and control of the business generally do have personal responsibility for unpaid trust fund taxes. Persons in control of a business should make sure that all trust fund taxes are paid when due, even when a business encounters cash flow problems. The volume of responsible party assessments issued by the Department reflects how common it is for businesses with financial problems to use trust fund taxes to pay other financial obligations. Lack of intent to “defraud” the Commonwealth is no defense to a responsible party assessment. Similarly, the fact that a “responsible party” may have received no financial benefit from the failure to remit trust fund taxes does not shield him or her from personal liability for the unpaid taxes.

It is sometimes possible for an individual to obtain relief from a responsible party assessment at the administrative appeal levels, but only if the individual can adequately demonstrate that he or she was not responsible for the operations of the business during the period when the trust fund taxes were collected. Even individuals who were “active and controlling” agents of a business may have grounds to appeal certain portions of a responsible party assessment, such as interest and penalties, or taxes assessed for periods when they were no longer in control of the business. We also have seen cases where a “responsible party” was erroneously assessed for tax liabilities of a business which did not constitute “trust fund” taxes because they were not taxes that had been collected from customers.

If an assessment is issued, and the recipient does not file a timely appeal, the Department will file a lien against the individual and may take other collection action. The circumstances under which an untimely appeal from a responsible party assessment will be considered are very limited. For example, in decisions recently issued by the Board of Finance and Revenue, the Board declined to consider untimely appeals filed by, among others, an individual who “was preoccupied with caring for his father who subsequently passed away,” and who had served as the corporation’s accountant during his illness, and by an individual who claimed that “the appeal was filed late at the Board of Appeals because an employee she was working with was fatally electrocuted on the job site” and she was “dealing with the legal setbacks and the emotional toll of the fatality.”