Many people are surprised to learn that there are circumstances when New York State is permitted to collect a business’s withholding tax and sales tax from responsible persons at the organization. Individuals who are notified that they are being held personally responsible for taxes often try to argue “it wasn’t me” and point fingers at someone else. However, that argument doesn’t necessarily work so it’s important to know the rules.
NYS Withholding Tax
Employers are required to withhold income tax from the wages of employees from each pay period. New York State may pursue individuals to collect a business’s unpaid withholding tax if that person (1) had the duty to collect the tax and (2) willfully failed to perform the duty. The unpaid tax is assessed against the individual as a penalty, and is not dischargeable in personal bankruptcy.
Taxpayers assessed as a responsible person are personally liable for 100% of the unpaid withholding tax, regardless of the individual taxpayer’s percentage of ownership, and may be liable for the unpaid interest. However, the individual is not liable for any penalties assessed against the company with respect to the unpaid withholding tax.
NYS Sales and Use Tax
New York State Tax Law §1133(a) imposes personal liability on every person required to collect sales or use taxes. The business’ full amount of tax, interest and penalties flows through to the individual, with interest accruing from the date the tax was due. There is no requirement of willfulness.
The liability is based solely on the third party’s status as a responsible person. General partners of a partnership and LLC members are all responsible persons – no duty is required.
The business’s entire tax liability flows through to the responsible persons, including accrued interest and penalties. However, the State must assess the responsible person within the Statute of Limitations for assessing the underlying Sales and Use Tax. In audit situations, potentially responsible persons are often asked to sign waivers of the statute at the same time as the company. When the State doesn’t obtain the waivers in time against the individual, some of the early quarterly periods can be barred from assessment.
Each responsible person must be assessed separately for the business’s tax liabilities. The responsible person does have rights to receive Bureau of Conciliation and Mediation Services, much like the original assessment against the business itself. Often, the notices are sent to the business and the responsible persons at the same time. A responsible person can protest both the tax liability and the status as a responsible person even if the company does not make a protest.
If you are subject to a Responsible Person Assessment, contact us for assistance.