Sections 40-29-72 and 40-29-73, Code of Alabama 1975, provide that responsible persons who collect or withhold trust fund taxes may be personally assessed with the business tax liability if they willfully fail to remit fiduciary taxes to the department.
As a business owner or official, can I be held personally liable for payment of business- related taxes such as income tax withholding and sales tax?
Can my personal assets be taken for payment of business-related taxes which go unpaid to the state or local governments?
Unfortunately, some Alabama business owners find themselves faced with such questions. Business failures are a reality, and it is important that you become aware of potential tax liabilities which could result from a business failing to pay certain taxes.
Most businesses have employees from whom they will be required to withhold income taxes each time a payroll is met. In addition, many businesses are required to collect state and local sales taxes from their customers. Once these taxes are withheld or collected, they are held “in trust” by the business until the tax return and payment become due. Because of this, these taxes are known as “trust fund” taxes. This means that you, as a business owner, act in a fiduciary capacity for the state. You are charged with the legal duty to withhold and/or collect taxes for the state and hold them in trust until the law requires their payment on either a monthly or quarterly basis.
Most businesses regularly pay these trust fund taxes in a timely manner as the law requires. However, for a small minority of business owners, under-capitalization leads to mounting financial problems which, in turn, leads to the temptation to “borrow” from these trust fund taxes to pay other business creditors. Such temptation may have serious consequences for the taxpayer. The tax statutes provide stiff criminal sanctions for failure to pay over these trust fund taxes to the state. Equally important are the civil sanctions which can be applied against a business. Civil sanctions include injunctions and entry of assessments which, when final, have the weight and legal authority of judgments.
If you are a sole proprietor or a partner in a partnership, your personal assets may eventually be seized if it becomes necessary to assess you with unpaid business- related taxes. Since all debts of sole proprietorships and partnerships follow their owners’ assets, this fact is not surprising to most people. However, you may not be aware that since 1984, the trust fund tax liabilities of corporations may be assessed to corporate officers and certain other key individuals within the corporation.
Many people purposely choose to in- corporate their businesses for the protection afforded them under the limited liability concept. However, in 1984 the legislature passed a statute which gives the Alabama Department of Revenue the authority to directly assess a penalty equal to the unpaid tax to those individuals who are responsible for collecting, accounting for, and/or paying over the trust fund taxes to the state and who willfully fail to do so.
For example, if you occupy a position within a corporation in which you have authority and control over payment of creditors and you choose to pay other creditors while trust fund taxes remain unpaid, you may find yourself personally assessed with the corporation’s tax liability. This procedure, commonly referred to as a “Trust Fund Recovery,” has been used by the Internal Revenue Service since 1954. Its purpose is to ensure that tax revenues are not lost if a corporation becomes defunct or has insufficient assets from which the taxes can be collected. Members of newer types of businesses such as L.L.C.s and Limited Liability Partnerships may also be assessed this penalty.
Should you find yourself facing the prospect of being unable to pay all of the debts of your business as they become due, we encourage you to make paying over these trust fund taxes your number one priority. Nothing is worse than having your business fail and still having to face the responsibility of repaying trust fund taxes to the state. Even filing a personal bankruptcy will not wipe out this type of liability.