Are You a Responsible Person?

Most everyone considers themselves to be a responsible person.  Ordinarily, that would be a good thing.  However, there is one context in which being a responsible person can expose a person to unwanted liability. It involves the payment of taxes by a business.

A “responsible person” under the tax laws can be held individually liable for any taxes that are owed by a business, but not paid.  For this purpose, a “responsible person” is anyone who controls the funds of a business and thus, could pay any taxes (e.g., sales, income, excise) owed by that business.  Usually, this would include anyone who has the ability to sign checks on behalf of a business, whether or not it is normally their duty to see that all taxes owed are paid.  Most, if not all, agency owners would fit within this description.

A recent Georgia Court of Appeals decision illustrates just how far the liability of a “responsible person” can extend.  In that case, the majority owner of a corporation first paid sales and use taxes owed by the corporation and then petitioned for a refund of part of the taxes paid.  Richard Moore, who was an officer of the corporation with the ability to sign checks on its behalf, was not notified of the refund action by the majority owner.  The majority owner’s petition for a partial refund of the taxes he had previously paid on behalf of the corporation was granted.

You probably know by now where this is headed.  The Georgia Department of Revenue decided that it had made a mistake in granting the refund petition.  But instead of suing the majority owner to get the money back, it sued Mr. Moore.  Understandably, Mr. Moore wondered how he could be held personally liable for the Department’s mistaken refund of taxes that he knew nothing about.

The Georgia Court of Appeals, acting on the Georgia Supreme Court’s holding that “responsible persons” are jointly and severally liable for the payment of all required taxes, held that Mr. Moore did not have to be involved in the refund action in order to be liable for the improper refund of taxes.  Joint and several liability means that a person can be sued individually for a debt owed by more than one person and required to pay the full amount of the debt.  It’s then up to the person sued to go after the other persons who are liable to pay their share of the debt owed.

Mr. Moore’s story should be a warning to all “responsible persons” to make sure that you know what the other “responsible persons” in your business are doing with respect to all the taxes owed by that business.  More fundamentally, all business owners should carefully consider who they rely on to pay the taxes owed by their business and establish procedures to make sure such taxes are paid as and when due.