If you are a business owner, one of the best reasons for becoming a corporation or limited liability company is that it protects you from personal liability.  For instance, if someone is hurt on the company’s property or by one of its products, the claim will likely be against the assets of the company and you will not be personally liable for it. However, there are several laws that “pierce the corporate veil” and make certain persons personally responsible for the company's debts.

How Does it Work?

When an employer fails to pay its withheld payroll taxes to the government, the IRS can collect the entire amount from a “responsible person” who “willfully” failed to pay the taxes. A “responsible person” is determined by that person’s status and authority as an owner, officer, board member or manager of the company. A person is “responsible” if he can sign checks or pay other creditors instead of the IRS.

A “responsible person” may not even know that he has been made a signer on the company’s bank account and may only sign checks when other officers or managers are not available.  However, liability has been assessed against a secretary that was given the title of “treasurer” and allowed to sign checks.  Liaibility could also extend to someone serving as the personal representative of an estate that owns a business.

Whether the person “willfully” failed to pay the taxes is defined very broadly.  The IRS must only show that the person’s actions were “voluntary, conscious and intentional”.  Even if the person did not have a bad motive, he can be found liable.  The IRS has successfully imposed the penalty in situations where the individual was valiantly trying to save the company from bankruptcy and to protect the employees’ jobs by paying creditors in full.

How Can I Protect Myself?

If you might be a responsible person and you suspect that the company has financial difficulties, it is up to you to ensure that the company isn’t violating the law.  This may include getting a written confirmation from the person who is responsible for payroll taxes that the deposits are not delinquent.  You should also be prepared to resign to protect yourself from personal liability.

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