Who Can Be Held Personally Liable for New York State Business Taxes?

In New York, the Department of Taxation and Finance (DTF) has the right to hold individuals responsible for unpaid sales or withholding taxes. The state is willing to go after individuals who have the authority and responsibility to track, calculate, withhold, deposit, or otherwise remit the business’s sales or payroll taxes to the NYS DTF.

If you’ve ever worked for or owned a business that failed to pay the correct amount of sales or withholding tax to the NYS DTF, then you could be held personally liable for the overdue balance. In this article, we’ll go over who might be considered a “responsible party” under the DTF’s direction, how the agency identifies responsible parties, and what you can do if you face a surprise assessment. To get help now, contact us today.

Key Takeaways

• Individual employees, shareholders, business owners, or others can be held personally accountable for a business’s delinquent payroll or sales tax if they’re determined to be “responsible persons.”
• The NYS Department of Taxation and Finance (DTF) has the authority to enforce collections through property seizure, wage garnishment, and even bank levies.
• If you are blindsided by an NYS DTF assessment for business payroll taxes, then contact a tax resolution attorney as soon as possible. Don’t delay in taking action.
• Trust fund taxes have a long statute of limitations in New York. The DTF has up to 20 years to collect from responsible parties.

What is a “Responsible Person” Under New York Tax Law?

Under the New York tax code, a responsible person is someone who makes financial decisions for a business. If you are found to be a responsible person, the state may go after you personally for certain unpaid business taxes.

Two specific laws dictate who is considered a “responsible person” under New York tax law. Section 1131 of the New York Tax Law defines any person required to collect tax for a business as a “responsible person”.

Further, Section 526.11 of Title 20 of the New York Codes, Rules and Regulations outlines exactly who is considered a “person required to collect tax”. The law designates individuals who make sales as vendors, those receiving dues or admission charges, hotel operators, officers responsible for tax compliance, individuals authorized to sign tax returns or maintain books, partners, and business owners.

In a nutshell, these two laws incorporate parties who make a company’s financial decisions, sign checks, oversee payroll, calculate bank deposits, and maintain the company’s records. In general, if you had a hand in making a business’s financial decision, then you might be considered a “responsible party”.

When is a Person Held Personally Liable for Business Taxes?

The state can hold a responsible individual personally liable for unpaid sales or withholding taxes. This may occur if the business files a return and doesn’t pay, or if a NYS DTF tax audit uncovers discrepancies, errors, or missed deposits. You may even be held personally liable if the business closes or financially folds ^[a].

Here’s why:

• Withholding taxes are taken from employees’ paychecks, withheld by the employer, and then remitted to the NYS DTF through timely deposits. These funds are never considered property of the business. This money belongs directly to the state of New York. You may also be held personally liable for state payroll taxes ^[b] that were supposed to be withheld and weren’t.
• Sales tax is collected from customers and also needs to be turned over to the NYS DTF.

With both withholding and sales tax, the business is acting as the middleman – it’s collecting tax from someone to send to the government. In contrast, other New York state business taxes, such as corporate income tax, franchise tax, and state unemployment premiums, are paid by the business. If the business doesn’t pay these taxes, the state can’t hold its owners, partners, or employees liable. That said, if the business is a sole proprietorship or a general partnership, then the owner or partners are responsible for all of the business’s taxes, based simply on the lack of limited liability with these business structures.

How Does the NY DTF Decide Who’s Responsible?

When a business starts experiencing sales or payroll tax issues, the NYS DTF will allow the business to resolve the situation before initiating a state investigation. However, if the business doesn’t reach a timely resolution – for example, paying in full or getting a payment plan approved – the state will start looking for a responsible party.

Once an investigation begins, the DTF will review the company’s records to determine titles and job duties, examine corporate and individual bank records, identify signatures, and ultimately pinpoint who had authority over the company’s finances. The DTF will also look at old state tax returns to attempt to determine who filed the forms and what information can be gathered based on the data in the forms.

Using all this information, the DTF will identify those who held decision-making authority in the company, were responsible for tax filings and payroll, and were aware of the tax delinquency. Any and all of these parties may be considered “responsible”.

What if the NY DTF Finds You Responsible for Business Taxes?

If the DTF determines you are a “responsible person”, then they will issue a Notice of Determination. This letter will be delivered to your home, explaining that you are being personally held liable for the overdue tax balance and any sales or payroll tax penalties and interest associated with the business account.

The letter will outline exactly how much is owed, including any interest and penalties.

The best way to resolve the situation at this point would be to pay off the balance in full, but you likely are not able to do so. When that’s the case, it might be best to get in touch with a tax resolution lawyer for more guidance.

If you ignore the notice, then the DTF will escalate enforcement actions. You could get served with a tax warrant that outlines a public judgment against your name. You could also have your NYS tax refund seized. Other possible collection methods include bank account levies and wage garnishments.

Keep in mind that you can still be held personally accountable for the business’s debt even if the business was sold, closed, or filed for bankruptcy.

Can You Dispute or Fight a Responsible Person Assessment?

Yes! If you receive an assessment, you are not obligated to accept it immediately. That said, you only have a limited amount of time to dispute or fight a responsible person assessment.

If the assessment hasn’t been levied yet, then you still have time to provide documentation to prove that you never had authority, access, or the ability to prevent the business’s tax delinquency. You can demonstrate this by clarifying your role through written statements, third-party verification, or providing other forms of proof.

If the assessment was already provided, then the law gives you 90 days to file a formal appeal or request reconsideration. For personal liability for sales tax assessments, eligible persons may qualify for the following relief:

• No penalties, and
• Only responsible for a portion of the sales tax and interest based on their share of the business’s profits and losses (only available to people with less than a 50% stake in the business)

For example, say the business owes $10,000 in sales tax with $1000 in interest, you own a 10% stake, and you qualify for relief through the DTF. Then, you’ll only be responsible for 10% of the liability, which is $1100 in this case.

If you choose to dispute or fight the assessment, then you’ll want to talk to a tax attorney or representative first. A lawyer can be your best advocate throughout the process and help you explore settlement options, payment plans, and other potential solutions.

Why You Should Take This Seriously – Even if the Business is Gone

The NYS DTF has a very long time to collect on a business’s past due payroll or sales taxes. Under New York State law, the statute of limitations on collecting unpaid taxes is up to 20 years.

Considering this long statute of limitations, many people wind up blindsided by these assessments that come years after they believed the situation was resolved and long in the past. Often, the individual has moved on to another company, or the business has completely gone under by the time they hear about the personal assessment.

Because of this, you need to take a DTF assessment seriously, even if the business is gone. Delaying a response to the DTF can leave you in an even worse position. Not only will you face enforcement efforts, like potentially having your bank account levied, property seized, and wages garnished. What’s more, delaying a response can cause you to miss the deadline on potential solutions, such as appealing the assessment or reducing your overall tax liability.

If you act quickly, you may still have the opportunity to reduce tax penalties, negotiate a lower liability amount, or demonstrate that you aren’t a responsible party.

Final Thoughts: Get Help Before You’re Personally on the Hook

If you thought your role as a financially responsible person within your business was simply a formality or business title, then you’d be far from the mark. Being identified by the NYS DTF as a “responsible person” should be taken extremely seriously. If you’re under investigation or you recently received a notice of determination, do not wait.

You should contact an experienced and qualified tax resolution lawyer as soon as possible. You and your legal advocate should discuss potential solutions like disputing the assessment, negotiating a relief plan, or protecting your assets before enforcement increases.

Schedule a free case review with our team here at Timothy S. Hart Law Group, P.C. by filling out our online form now, or you can call our team directly at (917) 382-5142.

Frequently Asked Questions: Personal Payroll Tax Liability

Do you have more questions about personal payroll tax liability within your business? Do you believe the NYS DTF might have reason to believe you are a potentially responsible person for your business’s delinquent tax situation? If so, then your best option would be to contact a tax resolution attorney directly. The right legal advocate can give you more accurate, customized, and effective advice that fits your unique situation.

That said, we’ll go over some general answers to some of the top questions about payroll tax liability below.

What can I do to minimize the penalties associated with a delinquent business payroll tax problems?

You can potentially minimize the penalties associated with a delinquent business payroll tax problem by taking action as soon as possible. Consult with a tax resolution attorney to determine your best options, which might include negotiating a payment plan with the DTF or even requesting to have some of your penalties reduced.

Typically, you’ll want to file any late returns if applicable or produce documentation regarding overdue payroll or sales tax. Next, consider all your options. Set up an installment agreement if possible, request an offer in compromise, file for currently noncollectible status, request penalty abatement, or pay off your overdue balance in full using a loan or credit card if necessary.

How will I know if I’m potentially liable for a business’s tax situation?

You should assume you are potentially liable for a business’s tax situation if you have authority over the company’s finances, bookkeeping, deposits, tax withholding, own the company, write checks on behalf of the business, or hold a power position title. You’ll know for sure that you’re being held potentially liable for a business tax situation when you receive a Notice of Determination in the mail. Once you receive this type of notice, it’s necessary to act.

Do I need a lawyer when I’m facing a DTF assessment?

Consulting with a tax attorney is not necessary but it’s highly beneficial for individuals facing the serious situation of being held personally responsible for a business’s overdue tax balance. The right tax attorney is going to be your best legal advocate, helping you to better understand your options, negotiate with the DTF, and prepare your documents.

Can the IRS hold me personally liable for payroll taxes?

Yes, just as the state can hold you personally liable for withholding tax, so too can the IRS. If a business doesn’t pay its payroll taxes, the IRS may assess a Trust Fund Recovery penalty equal to 100% of the unpaid withheld taxes, and that penalty can be assessed against responsible individuals.

Sources:

https://www.tax.ny.gov/research/collections/fy_collections_stat_report/2023-2024-annual-statistical-reports.htm

https://www.nysenate.gov/legislation/laws/TAX/A28P4

https://www.tax.ny.gov/pdf/memos/sales/m20-2s.pdf