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Lesson from the Tax Court: Serious mess for casual biz owner

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in Small Business Tax,Small Business Tax Deduction Strategies

The IRS may hold an individual personally liable for a “willful” failure to pay employment taxes on time. Even a hands-off business owner could be socked with a seven-figure tax bill.

New case:
Dr. Bean, a physician with a medical practice in Texas, put up the money to start General Express, a company making deliveries to restaurants and other businesses in the Houston area. Bean was the sole shareholder and officially designated as the president, although his nieces and other relatives ran the day-to-day operations.

All payroll checks required Bean’s signature, but his nieces generally handled the paperwork (e.g., stamping his signature on checks). He received the bank statements for General Express at his practice’s office. When the company struggled, Bean personally lent it about $200,000.

Despite the influx of cash, General Express continuously had trouble paying drivers, insurance premiums and installments on its trucks. It failed to file employment tax returns and make deposits of employment taxes for several years.

In 2003, the IRS began assessing taxes, interest and penalties against Bean as the person responsible for remitting withheld employment taxes on behalf of the company. By the time the case went to trial in 2008, the amount due exceeded $1 million!

Bean argued that he was merely the benefactor for a family-run business. But the district court disagreed. In his capacity as shareholder and president, Bean had oversight of the company and maintained frequent contact through phone calls and faxes. He clearly had signature authority over check signing and the power to withhold and deposit employment taxes. Result: This was a willful failure resulting in personal liability for the withheld taxes that were not paid to the feds. (Bean, So. Dist. Ct. Tex., 1/14/09)

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