Personal Liability for IRS or WA Business Tax Debt

One major reason to structure a business as a corporation or LLC (limited liability company) is to protect its owners, managers, and employees from personal liability for the business’s tax or legal liabilities. This liability protection has exceptions, such as “piercing the corporate veil,” which often arises in civil lawsuits.

Another exception applies to certain business-related taxes. Specifically, responsible individuals of the business could be personally liable for unpaid Washington sales taxes and federal payroll taxes in certain situations. The purpose of this blog post is to discuss these scenarios, how this liability works, and what you can do to protect yourself from these financial risks.

Key Takeaways

Most business tax debts are the responsibility of the business, but unpaid trust fund taxes are a major exception.
Trust fund taxes refer to taxes that a business collects from a third party (such as an employee or customer) and then holds in trust until the business can send that money to the taxing authority.
The IRS or WA Department of Revenue (DOR) can potentially hold anyone at that business responsible for the nonpayment of trust fund taxes personally liable.
The IRS and WA DOR can use tax liens and levies to go after the personal assets of responsible individuals.
The best way to avoid trust fund tax problems is to consult with an experienced tax professional and take a more proactive approach to business tax responsibilities.

Washington Business Tax Overview

Washington businesses will typically have tax payment and filing obligations with at least two levels of government: the federal government (with the IRS) and the state of Washington (with the WA Department of Revenue). There may also be local taxes owed, such as in Seattle.

Most of the business tax duties fall on the business itself. In other words, if there are taxes owed to the IRS or the WA Department of Revenue (DOR), it’ll be the business itself that’s on the hook for the tax debt. However, depending on the structure of the business and the type of tax owed, one or more individuals from the business could be personally liable for unpaid business taxes.

Personal Liability for Unpaid Business Taxes in Washington

Generally speaking, personal liability for business-related taxes will attach when the unpaid taxes are considered “trust fund” taxes by either the IRS or the Washington DOR. These taxes have nothing to do with trust funds, a type of estate planning tool.

Rather, these are taxes owed by customers or employees, but for which the business collects on behalf of the IRS or the WA DOR. The business then holds these funds in trust until they’re sent to the appropriate tax agency.

Federal Trust Fund Business Taxes

Examples of federal taxes that may be considered trust fund taxes by the IRS:

The withheld portion of employee federal income taxes
FICA (Social Security and Medicaid taxes) withheld from employees’ paychecks
Railroad retirement taxes
Certain excise taxes

Note that the employer match of FICA taxes is not considered to be trust fund taxes.

Washington State Trust Fund Business Taxes

Commonly encountered Washington State trust fund taxes include:

Sales tax
Heavy equipment rental taxes
Alcohol taxes
Retail sales taxes (including car rentals and digital goods)

Personal Liability for Trust Fund Taxes

Even though personal liability for business-related taxes is possible at both the federal and state levels, the conditions necessary for personal liability differ based on the type of tax, whether the missing trust fund taxes can be promptly paid, and the current status of business operations.

Federal Trust Fund Taxes

The primary source of personal liability at the federal level is the Trust Fund Recovery Penalty (TFRP). The legal basis for this penalty comes from Internal Revenue Code Section 6672, and the amount of the TFRP is equal to the amount of unpaid trust fund taxes. The IRS may recover the TFRP from the business and/or individuals responsible for the nonpayment of the trust fund taxes. The IRS will collect the TFRP only if:

Someone is “responsible” for the nonpayment or non-collection of trust fund taxes, and
The failure to collect or pay was “willful.”

A responsible person is someone who has the power and duty to direct actions relating to the collection and payment of trust fund taxes. This normally includes people such as:

Corporate officers
Shareholders
Partners
Non-managerial employees serving as a bookkeeper
Payroll service providers

Willfulness exists if the responsible person knew, or should have known, about the unpaid taxes, yet intentionally ignored (or was indifferent) to the legal obligations related to those taxes. A revenue officer will contact your business, interview owners/employees, and send notice if these penalties are being assessed against you personally.

Washington State Trust Fund Taxes

The Washington law that provides for personal liability for unpaid trust fund taxes comes from RCW 82.32.145. This law states that the Washington DOR may go after “any or all” individuals responsible for the nonpayment. There are several important points to keep in mind about personal liability under Washington law.

Unlike the TFRP, the Washington business must be insolvent or no longer in operation before the DOR can go after responsible individuals for payment.
The DOR must first have issued a tax warrant for the unpaid trust fund taxes from the business.
The personal liability applies to the unpaid taxes, not a penalty for nonpayment.
The business must be a limited liability entity – otherwise, if it’s a general partnership or a sole prop, the owner is automatically personally liable for the business’s taxes based on its structure. Qualifying structures include:

Corporations
Trusts
Limited partnerships
Limited liability partnerships
Limited liability companies

Unlike with TFRP liability, the job title of a responsible person can sometimes be a relevant factor in Washington. For example, if the responsible person is the current or former CFO (chief financial officer) or CEO (chief executive officer), the DOR may deem them personally responsible “regardless of fault or whether they should have been aware of the unpaid trust fund tax liability.” All other individuals will only be considered responsible if they acted willfully concerning actions that resulted in the Washington DOR not getting paid.

Personal Liability for Business Taxes in Washington
Type of Unpaid Tax	Business Liable for Unpaid Taxes?	Business Liable for Penalties?	Personal Liability for Unpaid Taxes?	Personal Liability for Penalties?	Additional Notes
Federal corporate income tax	Yes	Yes	Rare	Rare	Shareholders may be liable in cases of comingling (mixing business and personal finances) or tax fraud.
Federal payroll taxes withheld from employee paychecks	Yes	Yes	Rare	Possible	If these taxes are unpaid, the IRS may apply a TFRP to responsible individuals.
Washington’s Business and Occupation (B & O) tax	Yes	Yes	Rare	Rare	When the business is a separate legal entity from the individual, then personal liability is unlikely.
Washington sales tax	Yes	Yes	Possible	Possible	Personal liability only applies if the business is no longer in operation or is insolvent.
Unfiled business tax returns	N/A	Yes	N/A	Rare	When the business is a separate legal entity from the individual, then personal liability is unlikely.

Tax Collection Tools of the IRS and Washington DOR

The tax collection tools available to the IRS and WA DOR for unpaid business taxes are also available when personal liability applies. So if you’re personally required to pay for unpaid trust fund taxes or penalties, you can potentially expect a:

Before these things happen, you’ll likely receive multiple notices or letters asking for payment. Some of these documents may include:

Notice and Demand for Payment
Notice of Balance Due
Delinquency Notice
IRS Letter 1153

With both the DOR and the IRS, there are several times when you can appeal during the personal assessment process, but you must do so by the correct deadline or risk losing the chance. That’s why it’s critical to review the notices carefully and reach out for legal help as soon as possible.

How to Avoid Personal Liability for Business Taxes in WA

It’s possible to fight a business tax assessment that goes after you, but like many other things in life, prevention is usually much easier. Here are some things you can do to prevent trust fund tax problems and avoid opening the door to personal liability:

Hire a payroll company to manage the payroll obligations of your business, and keep tabs on their work to ensure they’re paying the taxes correctly.
Avoid mixing business funds with general business funds – comingling can be a major reason to pierce the corporate veil, increasing the risk of personal liability for both taxes and other types of business debts.
Always make timely payments and filings, such as IRS Form 941 Employer’s QUARTERLY Federal Tax Return – consider using software that automates payments and filing to be on the safe side.
Stay apprised of current employment tax laws and obligations – or work with a tax pro, payroll company, or payroll software that automatically updates as the laws change.
Be proactive about business tax obligations and requirements.

In all cases, if you’re worried or getting behind, consult with a tax professional experienced in handling payroll tax matters.

What To Do If the IRS or DOR Believes You’re Personally Liable for Unpaid Business Taxes

If you believe you or your business might face trust fund tax trouble from the IRS or the Washington Department of Revenue, it’s time to get professional tax help. A Washington-based tax attorney, such as John Georvasilis from Seattle Legal Services, PLLC, can help assess your situation, explain your options, and recommend a course of action, especially when asked to attend a Form 4180 interview.

After the trust fund tax matter is resolved, our legal team can also help you take steps to avoid similar problems in the future. To learn more, call 425-428-5262 or complete our online contact form.

Washington Business Tax Personal Liability Business FAQs

Can I be personally liable for business taxes if I’m just an employee or manager?

You certainly can, as both federal and Washington state law focus primarily on actual duties and responsibilities to determine liability, not job titles. However, holding certain job titles can make it easier to be deemed responsible under Washington law.

If multiple people are responsible for the trust fund tax debt, can the IRS or WA DOR go after all of us or just one of us?

Unpaid federal and WA state trust fund tax personal liability can be potentially assessed against more than one individual. If multiple people are deemed liable, the IRS and Washington DOR have the right to seek payment from one or all individuals. So if you’re one of two people responsible for the unpaid trust fund tax debt, there’s a chance you could pay 100% of the amount even if you were only 50% responsible.

Can the Washington Department of Revenue seize my personal bank account?

Yes, if you’re deemed to be one of the responsible individuals for the unpaid trust fund taxes. The same tools that are available to recover any other unpaid tax debt in WA are generally available to collect an unpaid business tax debt.