California payroll taxes can be confusing for many business owners. Likewise, California imposes sales taxes on many vendors and merchants and with monthly remittance, and even prepayments, to the CDTFA. With the frequent filing of sales and employment tax returns and payments, even well-intentioned businesses can fall behind on payroll and sales tax obligations. When the government finds that a business has failed to withhold and remit sales or payroll taxes correctly, it can go after the personal property of the responsible officer.
If your business is behind on payroll taxes or facing a trust fund recovery penalty, call Sacramento tax relief attorney Jin Kim at (916) 299-9913 for a free consultation and learn how you can resolve payroll tax liability.
The Concept Behind
The government has a different way of collecting sales tax, compared to other taxes. Sales tax is collected on behalf of the government by the vendor. So when you pay a vendor a specific amount which includes taxes, the vendor withholds the taxes on behalf of the government. The vendor is then expected to remit the collected sales tax on behalf of the government. Because this is technically the government trusting business people to collect taxes on their behalf, it’s often called a trust tax.
This solution solves the problem of collecting sales tax efficiently on a massive scale, but it also admits several problems. For one, there is the possibility of the vendor making an honest mistake and collecting no tax or too little tax. It’s also not uncommon for some to use up the amount meant for taxes to solve liquidity problems in the business temporarily while they find a permanent fix. When these problems arise, the government can go on the offensive and require the business owner to pay the assessed deficiency.
Responsible Officer Liability
The government has a wide range of powers available at its disposal in order to efficiently collect taxes due to it. Most business owners take precautions to separate their personal assets from their business assets. The reasoning behind this is to protect personal assets if ever the business encounters problems. However, even this precaution can be invaded by the government. In fact, it can hold a person liable up to his personal properties for taxes owed by a business entity.
The government can go after your personal properties for business tax concerns when it finds that the person is a responsible officer. Under the Revenue and Taxation Code, the California Department of Tax and Fee Administration may pursue a person for any unpaid corporate sales and use tax liability.
This usually happens when there is the termination of a business or limited liability company. The person can be anyone – a member, an officer, or a manager. The important part is that the person must be charged with the responsibility of filing returns or paying tax, or under a duty to act for the corporation or limited liability company in complying with any requirement. There is a requirement that the omission or failure to pay must be willful. There must be intent on the part of the responsible officer not to pay. In other words, an honest mistake on the officer’s part will exculpate them from this liability.
If there are multiple responsible officers – for example, the first one resigned and was replaced, then each of them will only be responsible for the period in which they had the control, supervision or duty to act for the corporation. However, they will also be responsible for penalties and interest on those periods which they are found responsible.
The concept of the responsible officer liability seems daunting – and it is. But it isn’t automatically levied on your personal properties either. For a clearer, better view of the picture, it’s best to seek advice from an experienced tax professional such as a tax lawyer.
- What is the Trust Fund Recovery Penalty? - August 25, 2022
- CDTFA Notice of Levy - August 8, 2022
- The Statute of Limitations on Deficiency Assessments - June 2, 2022