If you’re going to take a job at a company with finances you know are iffy, it pays to conduct some due diligence and flesh out the exact parameters of your authority before you sign on. A federal trial court has ruled that an auto body shop’s inside CPA/controller was personally responsible for 100% of its unpaid payroll taxes. It was enough, the court said, that the CPA had some authority over the company’s finances; exclusive authority wasn’t necessary. (U.S. v. Cooke et al., No. 1:08-cv-01415, D.C. S. Ind., 2011)
Third time’s not a charm
The auto body shop’s founder’s first company went bankrupt. His second company racked up huge debts, and his third company was the successor to the second.
A CPA took a job as the third company’s inside CPA/controller on the recommendation of the bankruptcy attorney. With sole authority over the company’s finances, he was given a 10% ownership interest. He maintained the company’s books and records, prepared tax returns, had check-signing authority and stored the company’s checkbook in his desk.
The company ran into financial difficulty, leaving $150,101 of its payroll taxes unpaid. Another investor was brought in and the CPA’s ownership interest was reduced to 6%. Thereafter, the investor chose the creditors who would be paid—and the IRS wasn’t among them. The CPA did, however, maintain some independent authority over the company’s checkbook.
6% control = 100% liability
The IRS asked a federal trial court to summarily rule that the CPA was responsible for 100% of the company’s unpaid payroll taxes. The CPA admitted responsibility for the quarters before the investor came on board, but disputed liability for the remaining quarters. CPA: I wasn’t responsible for the defaulted payroll taxes because I was following the investor’s orders regarding the creditors to pay.
The court ruled for the IRS, concluding that a just-following-orders defense doesn’t absolve a corporate officer from personal responsibility for failing to remit payroll taxes. Court: A responsible person need not have exclusive control of the employer’s finances or the final decision-making authority over which debts to pay. He need only have significant authority over the decision-making process by which the employer allocates funds to other creditors in preference to its withholding tax obligations.
Hindsight is 20/20
In retrospect, taking a job with a company on the recommendation of its bankruptcy attorney might not have been the CPA's wisest move. Small companies often bring in outside investors, shaking up their organizational charts in the process.
If you find yourself in a similar position, it’s prudent to clarify your authority, even if it means giving up the company checkbook. Be prepared to resign if the company defaults on its payroll taxes. This court was blunt: The only way the CPA could have avoided 100% liability was if he had disrupted the company to such an extent that its payroll taxes were paid. That, the court acknowledged, would have been a dismissable offense.
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