The Illinois Independent Tax Tribunal has ruled that the president of a healthcare corporation was personally liable as a responsible officer for unpaid Illinois income withholding tax in 2013 and 2014. The president incorporated the taxpayer in 1994. During the years at issue, she was the president and 69.5% owner, her late husband served as vice president and her son was secretary-treasurer.
The president became ill in 2012 and took a medical leave, turning over the day-to-day operations to her son. There was no formal transfer of power, although the son assumed managing all operations including tax and financial matters. The president returned to leading the company on a part-time basis in January 2013. Her son still managed the operations but the president retained check writing authority. In 2013 and 2014, the taxpayer was subject to a Medicare audit resulting in a freeze of various reimbursements. Because of the freeze, the taxpayer did not make withholding tax payments to the Illinois Department of Revenue for those years. The son informed the department that the decision to forego withholding payments was his and not his president-mother’s. The son was assessed for the underpaid withholding taxes and subsequently indicted, convicted and incarcerated for not paying the assessment.
Despite the son’s admission that he was responsible for the failure to pay, the tribunal found that the president was a responsible officer under Illinois law and thus liable for the withholding tax. Illinois requires employers to withhold and remit income tax on compensation paid. If a corporation fails to remit the withheld tax, its responsible officers are personally liable for the unpaid amounts plus interest and penalties. The tribunal concluded that the president was a responsible person because she remained president, was the majority owner, had check writing authority and knew that the company was failing to make withholding payments. The tribunal noted that the son’s admission that he was responsible for the failure to pay was irrelevant under Illinois law which allows for a finding of multiple responsible officers.
The tribunal’s decision is one of a long line of responsible officer cases across the country. Businesses must withhold and remit income taxes on compensation paid to their employees. Failure to do so is a serious matter. Not only is the business liable for the tax but, as in this case, officers and directors can be personally liable. Corporate officers, owners and responsible parties of businesses with sales tax collections should be aware of consequences for failing to pay withholding tax. Businesses often experience cash flow problems; this is particularly true during the COVID-19 pandemic. But as this case illustrates, withholding taxes must be paid to the state no matter a company’s financial situation. Moreover, in this case, personal illness and the finding of another as a responsible officer did not shield the president from liability.
In Illinois and many other states, a responsible officer is defined as someone with significant control over a firm’s business. Although none are dispositive, the indicia of significant control include: the authority to direct taxes be paid, ownership of significant amounts of stock, check signing authority, the ability to hire and fire, control over compensation and the ability to enter into contracts. Taxpayers should review their withholding compliance processes in order to increase efficiencies and avoid errors that could lead to personal responsibility.
Importantly, personal responsibility extends beyond withholding taxes. Corporate officers, owners and employees in charge of financial decisions could also be held personally liable for unremitted sales and use taxes leading to substantial monetary and criminal penalties. Consult with your state and local tax professional for more information on responsible party liability.