When companies experience economic problems, those responsible for managing financial issues often have difficult decisions to make. When matters become serious, for example, it is often tempting to improve liquidity by deciding to delay the remittance of trust fund taxes in favor of making payroll and hoping that additional expected income will improve the situation. But when the expected income and needed capital are not forthcoming, and when bankruptcy is looming, making these types of decisions can have direct material adverse consequences to the directors and officers charged with remitting those taxes.
Federal, state, and local taxing authorities, pursuant to a growing number of laws in this area, regularly impose personal liability on those that are responsible for directing funds away from the payment of tax. The risk is greatest with respect to the non-payment of “trust fund taxes.” Trust fund taxes are taxes that the company is presumed to hold “in trust” for the benefit of the governmental unit to which it is due. Another way to think of it is as a tax that companies collect on behalf of a taxing authority. While they vary by jurisdiction, the most common of these include fuel taxes, sales and use taxes, payroll taxes, and other excise taxes. But even in the context of taxes that are not “trust fund taxes,” such as use tax on purchases from suppliers who are not required to collect tax in your jurisdiction, more and more jurisdictions are attempting to impose personal liability.
A common misperception is that putting the company in bankruptcy will solve these issues. However, when a company is put in bankruptcy, the officers and directors of the company are not the debtors undergoing bankruptcy, only the company is. This means that the officers and directors are not protected by the automatic stay. Further, if the debtors do not have sufficient unencumbered funds from which to pay these tax claims, the “responsible person” may be on the hook for these unpaid taxes.