Avoiding the Trust Fund Tax Trap



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wausau tax attorney nathaniel j krautkramer profile
Authored by Nathaniel J. Krautkramer

If you own a business, you know that there a numerous debts and obligations that you need to pay each month. Vendors and suppliers need to be paid, so products are available for your customers. Utilities need to be paid so the lights stay on, and the rent or mortgage needs to be paid so the doors can stay open. When things are going well, paying these liabilities is often not a problem. However, when business slows down it becomes necessary to determine which bills get paid and which creditors have to be postponed. Unfortunately, many of my clients do not know that there are certain types of taxes that business owners can be held personally liable for, even if their business is being operated as a corporation, partnership, or limited liability company. These taxes are referred to as trust fund taxes.

Generally speaking, trust fund taxes are those which your business collects, and then is responsible for paying over to the taxing authority. Common examples of these types of taxes in Wisconsin include federal and state withholding, sales tax, and excise taxes such as the motor vehicle fuel tax. For example, you withhold employment taxes from your employees' paychecks; when you do so, you are holding these employment tax funds in trust for the government's benefit. You are then required to file and pay these withheld employment taxes to the Internal Revenue Service or Wisconsin Department of Revenue.

If your business fails to pay these trust fund taxes, the tax authorities can assess the responsible parties within your organization with personal liability for the unpaid taxes. Responsible parties can include the owners of the company, the officers and directors, and the bookkeeping staff. Liability is based upon the job functions being exercised: who decides which creditors get paid, and when; who is responsible for preparing and filing the trust fund tax returns, and paying the tax; and who has check signing authority within the organization. There will always be at least one responsible party within a company, though the tax agencies will cast as wide a net as possible in their attempts to assess these taxes, because the more people that are held liable for the trust fund taxes the better the odds that the debt will be collected.

Another issue to note with these trust fund taxes is that they are not dischargeable in a bankruptcy. While individual or corporate income tax debts can be wiped out in bankruptcy if certain conditions are met, trust fund taxes which have been personally assessed against a person will survive bankruptcy. These tax obligations will either need to be paid, or resolved through filing an offer in compromise with the IRS or a petition for compromise with the Wisconsin Department of Revenue.

In certain circumstances, the failure to pay these trust fund taxes can even lead to criminal prosecution. Earlier this month the CFO of Tulsa-based Arrow Trucking Co. was sentenced to 35 months in prison, after the CEO and owner was sentenced to seven and one-half years on bank fraud, tax fraud, and tax evasion charges. Based on reports from the court cases, the company withheld taxes from employees paychecks but then failed to report or pay these withheld amounts to the state and federal authorities. During the investigation it was found that executives instead diverted funds towards the purchase of expensive sports cars and a lavish wedding for the owner. In addition to the jail time, the responsible parties are liable for the approximately $5.0 million in unpaid employment taxes. While criminal prosecution is not a likely outcome in most cases, where taxes are properly reported but simply are not paid, the Arrow Trucking cases show that criminal prosecution is possible.

So if you own a business and are facing financial difficulties or have unpaid tax debts, give the bankruptcy and tax attorneys at Krautkramer & Block law firm a call at (715) 842-2162. We will help you with your problems, and get your legal life in order.

This blog post contains general information regarding public news, matters, and developments in the law. None of the information contained on this blog post is intended as legal advice or opinion relative to specific matters, facts, situations, or issues. Additional facts and information or future developments may affect the subjects addressed and no guarantee is given that the information provided in this blog post is correct, complete, and up-to-date. Consult with an attorney before acting or relying upon any information contained in this blog post.
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