Selling Your Business? Don't be on the Hook for the Successor's Unpaid Payroll Taxes
The unpleasantness of dealing with the IRS can make us reluctant to do anything that might make their job easier, such as letting the agency know about a new mailing address. But, did you know that if you don’t notify the IRS of certain business changes, such as a change in responsible person, you could be on the hook for payroll taxes that aren’t paid by the new owner?
A little-known IRS form, Form 8822-B, Change of Address or Responsible Person – Business, can keep you safe from that liability. This form is used to notify the IRS of a new mailing address or a new responsible person for a business. Since Jan. 1, 2014, the IRS required this form to be filed within 60 days of a change of address or a change in responsible person.
When a new business applies for an employer identification number, the application includes the name and Social Security number of the “responsible person.” This person is the one who “controls, manages or directs the applicant entity, and the disposition of its funds and assets.” If a business fails to pay payroll taxes, the IRS will seek out a responsible person and impose a Trust Fund Recovery Penalty (TFRP) against that person.
The portion of payroll taxes withheld from employees’ paychecks is considered to be held in trust by the employer, until the taxes are paid over to the federal treasury. The trust fund portion of payroll taxes is money belonging to the employees that’s owed to the government. It is no longer an asset of the business. A TFRP consists of the withheld payroll taxes — federal income tax, Medicare and Social Security taxes — plus interest.
Code Section 6672(a) allows the IRS to seek out “any person required to collect, truthfully account for and pay over any tax” withheld and owed to the taxing agency. The use of the words “any person” means the IRS can pierce the corporate veil and collect from whomever they deem to be the responsible person. The IRS is aggressive in seeking out and collecting from whomever they determine to be responsible for the non-payment of payroll taxes. In addition to an assessment for the TFRP, criminal charges and jail time are possible.
Form 8822-B is the method to communicate with the IRS when there’s a change in the designated responsible person. Failing to update the IRS of this change means the IRS may pursue the person still on record as the responsible person if there’s an issue.
That’s what happened to Eric Cox when he sold his company in the third quarter of 2010 and the new owner failed to pay payroll taxes. Since Mr. Cox was still on record as the responsible person, he received a letter notifying him that payroll taxes for the fourth quarter of 2010 and the first two quarters of 2011 were unpaid. The letter was dated Jan. 7, 2014, and gave Mr. Cox 60 days to respond.
Unfortunately, Mr. Cox missed the deadline to respond by one day. Even though the judge admitted that he had a good case for not being held responsible for paying those taxes, procedural requirements would not permit him to let Mr. Cox off the hook.
The moral of the story: if you sell your company or there’s a change in the responsible person, be sure to file form 8822-B. The IRS doesn’t assess a penalty for not filing this form, but then you risk being on the hook for unpaid payroll taxes if you don’t file it. And, if your mailing address changes, you may not receive timely notification of any assessed taxes.