Being a responsible person is a good thing. Of course, there are two sides to every coin and the same applies when using this term. In terms of the IRS, carrying the responsible person label in a role associated with a Minnesota business can mean significant headaches for you in the event of a dispute over taxes.
That can happen even when your motivations are pure. The issue that the IRS is very likely to focus on is whether your actions represented a willful disregard in meeting an outstanding tax obligation. And if circumstances are right, the courts may well stand with the IRS, as a Texas doctor learned recently.
What a responsible person is in terms of a business is one who has signatory authority over company funds. In this particular case, the doctor acknowledged he was such a party. The business was the medical practice he had started. However, he also had hired a chief financial officer. That person took care of payroll. He had also embezzled funds and failed to pay staff payroll taxes. The CFO eventually pleaded guilty to the theft.
According to court records, the doctor learned on May 11, 2009, that a tax bill in excess of $10 million existed. However, on May 15 of that year, the doctor lent the practice $100,000 of his own money to meet payroll then due. The IRS proceeded to penalize the doctor more than $4 million. It argued that as a responsible person, the doctor should have put that money toward the taxes owed. By not doing so, he acted willfully.
The IRS and a federal appeals court both ruled against the doctor in his efforts to get out from under the tax obligation. He is now appealing those decisions arguing that his action was reasonable and not willful. He hopes to have the court shift the obligation to the former CFO.
What this all points to is that if you have responsible person status within a business, you need to understand what your obligations are and the liabilities you could incur due to the actions of others. If controversies arise, speak with an experienced attorney.