Officer and A Lady ... Ask TaxMama ... June 6, 2004

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Published by Eva Rosenberg, MBA, EA
Volume 6, Issue 261 June 6, 2004


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Officer and A Lady

» From: South Dakota

Dear TaxMama:

I am -- or, rather, was, an employee of a small construction company. The company was a corporation, with two partner/stockholders. I was listed as an officer and director, but this was for the conveninece of the owners (so that I could sign papers, get info, etc.).

In reality I functioned not as an officer but as an employee only. In other words, no decisions were made at the officer/director level, I had no authority, and, although I was a signatory on the checking account, all my actions were taken at the direction of one or both partners.

Now the company has gone bankrupt, and as is often the case in these situations, along with over $3000 of unpaid wages to me, there are unpaid payroll taxes.

Relatively speaking, the unpaid taxes are a small amount -- less than $5000 -- but I would like to know what the chances are that the IRS is going to come after me (as an officer) to collect these taxes?

Grace

Dear Grace,

What a slimy thing for them to do to you!

You have my deepest sympathies.

You're about to become the poster child for Form over Substance.

You knowingly accepted the positions as officer and director. You willingly accepted the responsibility of signing checks.

NEVER, EVER DO THAT!!!!!!!!!!!!! If you don't own the company and have control over the decision-making process.

You've been set-up.

Of course it was for the convenience of the owners. They're probably off the hook. YOU signed the checks. You had the nominal responsibility of deciding which checks to write and which not to.

Don't ever do it again.

At least you're in luck. The balances aren't huge.

The odds are excellent that IRS will come after you. There is a lot of legal precedent for them to go after bookkeepers and other lower-paid employees for the sins of their bosses.

If you're really credible and can persuade them to go after the real owners, AND you get a really sympathetic Revenue Officer, you might get off the hook.

If they have assets, and the ownership of the businesses, IRS will try to collect from them.

But, I'll tell you, IRS will take the easy way out. They'll collect from whoever's assets they find first. It will be up to you to sue the officers, as individuals. The legal costs may be higher than the taxes due - unless you settle for the Small Claims Courts limits.

Here are some of TaxMama's JOB RESPONSIBILITY RULES

Never accept a position as an officer of a company unless you actually have the authority to go with it.

NEVER sign on a company's bank account - for their convenience. If you must, insist on having the company pay for an liability policy specifically to cover you, and any assessments against you, in case of problems.

Never let a company default on employees or freelancers. Those people (you) have to live on these earnings.

If the company is about to fold, or file bankruptcy - pay employees and taxes first. Other vendors don't have as much recourse, except to take their merchandise back.

_______________

When companies want to make you an officer, for their convenience, sure, it's good for your ego. It's also a warning sign - a big red flag.

I had a company make me an offer like that - to set up a tax preparation operation for a company that only did tax problem resolution. They were notorious for overworking their staff. When I asked him if I would have control over who got hired, how they got trained and the hours they worked, they said, "No, but you get to be president." Big deal.

I turned them down. Good thing. The following April they were raided by IRS. The company's gone now. I don't think any officers did jail time - but one employee, doing what the owners instructed him to do, did go to jail. That could have been me. (Nah, I wouldn't have done what he did.)

Use your instincts, not your hunger. Or your ego.

For now, I suppose you'll have to sit back and wait to see what IRS does.

But, where is the mail going? If IRS is trying to collect from you, will you even know it?

Good luck. If anything happens, let me know and I'll try to guide you.

Best wishes,

Eva Rosenberg
Your TaxMama

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