When state and federal taxes go unpaid, business owners often assume that only the business’s finances are at risk. However, there are laws at the state and federal level allowing the government to hold business owners (and other responsible parties) personally liable for unpaid taxes in some situations.
This allows the government to seize an individual’s wages, bank accounts, real estate, and other assets to cover the business’s unpaid tax.
Knowing why and how this happens can help you be more proactive about your business’s tax needs and avoid personal liability. Worried that your personal assets are at risk? Call the Law Offices of Stephen B. Kass at 212-843-0050 to discuss your next steps now.
Key takeaways
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- Your LLC or corporation does not automatically shield you from personal liability for certain business taxes.
- Payroll taxes and New York sales taxes are considered trust fund taxes, and owners can be held personally liable.
- New York State is known to issue tax warrants against individuals for unpaid trust fund taxes.
- Early action is the best way to protect your personal assets from seizure.
- Working with an experienced tax attorney is key to protecting your business and personal assets.
Why Business and Personal Finances Aren’t Always Separate
Business owners often believe that their entity structure protects them from being held personally liable for the business’s debts. And that’s true in some cases – forming an LLC or a corporation creates a clear boundary between the business and its owners or officers. However, this separation is often challenged when it comes to unpaid taxes.
In many legal matters, corporate and LLC structures absolutely do shield business owners from liability. But when taxes are involved, both the IRS and the New York State Department of Taxation and Finance can pierce the veil to collect past-due taxes. Unpaid trust fund taxes are particularly risky for business owners.
Additionally, at both the state and federal levels, businesses may not be considered separate entities if:
- corporate formalities are not followed,
- personal and business finances are commingled,
- Business accounts are used by the owner for personal purposes, or
- Records are essentially nonexistent.
Failure to remit trust fund taxes–including payroll taxes at the state and federal level and sales tax in New York–is a serious error that ramps up the likelihood of personal liability. These are trust fund taxes that are collected directly from customers or employees. Businesses are meant to hold those funds in trust for the government until their next payment date. Tax agencies respond aggressively to the misuse of these funds.
When Business Tax Debt Becomes Personal Liability
Clearly, business owners are not always held personally liable for unpaid business taxes, so it’s important to understand when you face personal risk and how to address it. These scenarios outline some of the most common ways that business owners may find their personal assets at risk.
Sole Proprietorship or Partnership
Sole proprietorships and general partnerships offer none of the protections that corporations and LLCs do. They are pass-through entities, so the income and debts of the business become the income and debts of the business’s owners. Partnerships are perhaps even riskier than sole proprietorships, as one partner may be held liable for debts accrued by the other partner, due to the concept of joint and several liability.
Alter Ego Doctrine
The alter ego doctrine allows the IRS to collect unpaid business taxes from an individual when the business is just an extension of the individual taxpayer. This goes both ways; if either of the entities accrues debt, the IRS may go after their alter ego for payment.
To do this, the IRS must first determine if the two entities operate as if they were the same entity. If a business owner commingles their personal and business assets, does not observe corporate formalities, utilizes the business’s funds for their own personal benefit, or moves assets between themselves and the business without paying for them, the IRS may consider the business an alter ego of the individual.
Trust Fund Recovery Penalty
This is one of the most well-known ways that an individual may be held personally liable for tax debt. If a business withholds employee taxes and does not remit them to the IRS as legally required, the IRS can name one or more responsible parties and assess the Trust Fund Recovery Penalty against them personally.
The TFRP is equal to 100% of the unpaid withheld taxes. Anyone who has the responsibility and ability to remit the withheld taxes may be considered a responsible party. This includes owners, bookkeepers, managers, officers, and others with financial responsibility in the business.
Personal Liability for Sales Tax
When it comes to sales tax, the New York State Department of Taxation and Finance is aggressive about securing payment from a responsible party. State tax law states that anyone required to collect sales and use tax can be held personally liable for that tax.
How the IRS Enforces Collection Against Individuals
Once the IRS has officially assessed the TFRP or otherwise deemed you personally liable for business tax debt, they can use any of the collection actions granted them in the Internal Revenue Code. They have the right to go after any personal assets held by the individual, including their bank accounts, wages, real estate, vehicles, and other property–even if they own that property jointly with another party.
Some of the collection actions you may see include:
- Liens: When the IRS places a lien on your assets, that lien attaches to all currently owned assets and any assets you obtain while the lien is still active. Liens are publicly accessible and may prevent you from selling, refinancing, or transferring your property.
- Levies: The IRS can also step in and claim personal bank accounts, garnish your wages, seize payments owed to you by other parties, intercept your tax refunds, and claim commissions owed to you. While levies can occur independently, they often occur after a lien has already been placed on the assets.
- Seizure of real property: In addition to seizing funds and wages, the IRS can take actual physical property, including real estate, vehicles, boats, and other tangible items.
- Loss of passport: If your tax debt is considered seriously delinquent–more than $66,000 as of the 2026 tax year–the IRS can also ask the State Department to revoke your passport or deny your passport application.
State-Level Risks for New York Business Owners
NYS can hold business owners personally liable for unpaid sales or withholding taxes. The State may also hold individuals personally liable for state business taxes in certain situations as outlined above.
If you’re deemed personally liable for New York State business taxes, the Department of Taxation and Finance (DTF) may take aggressive action to collect what’s owed. Their collection actions are largely the same as those used by the IRS. They may issue a tax warrant, which is a tax lien that covers everything you own.
If a tax warrant does not result in payment of the tax owed, it can levy your financial assets and seize your physical assets. The Department may also garnish your wages via an income execution. The Department also has the right to refer your case to a private debt collector or suspend your New York State driver’s license.
When This Crosses Into Criminal Territory
Tax agencies tend to draw a hard line between casual or negligent mismanagement of money and criminal tax fraud. If you end up personally liable for business taxes, it’s unlikely to cross into criminal territory unless you willfully defrauded the government or evaded tax assessment or collection.
Whether or not the government pursues criminal charges depends on a wide range of factors, including the amount owed, continued and intentional failure to remit payment, and efforts to resolve the situation.
Regardless of whether or not you think criminal charges are a possibility, early intervention is critical when you are dealing with personal liability for business taxes. Whenever possible, tax agencies prefer to resolve these issues voluntarily instead of collecting payment by force.
How to Protect Yourself Before It Gets Personal
The best way to protect yourself from personal liability is to set up strong systems ahead of time. Even if you are already facing this issue, it is never too late to work with a tax professional to:
- Maintain clear separation of finances: Avoid commingling business and personal finances to protect yourself from personal liability. Keep clear records for all transactions in your business account.
- Document payroll and tax compliance, as well as who handles these responsibilities: Written delegation of financial responsibilities can help prevent the wrong person from being personally assessed the TFRP. Proof of ongoing compliance efforts can also show your good faith efforts to obey tax laws.
- Address tax agency notices immediately: Harsh consequences come from ignoring tax agency communications. Addressing these communications immediately can help you prevent more aggressive collection efforts.
- File all returns on time: Even if you cannot pay the tax due in full, file your returns on time. This shows that you are not attempting to evade fair assessment and helps you avoid failure-to-file penalties.
Resolution Options If Your Personal Assets Are at Risk
If state or federal tax agencies have already decided to hold you personally liable for business tax debt, there are several ways you can attempt to resolve the issue:
- Installment agreement/installment payment agreement: Both New York State and the IRS offer installment agreements to taxpayers. These arrangements allow you to spread payments out until the collection period ends, which tends to be much easier to budget for than immediate payment in full.
- Offer in compromise: You can apply for an offer in compromise at the state and federal level. If paying the debt in full would cause you financial hardship, the tax agency in question may be willing to settle for less than you owe.
- Appeal improper assessments: If you believe you should not have been held personally liable for the tax debt, you can follow the agency’s appeals procedures. Working with a tax attorney can help you make the most of your shot at an appeal.
- Penalty relief: First-time and reasonable cause penalty abatement is offered by the IRS. The New York State Department of Taxation and Finance also allows tax professionals to request penalty relief for their clients.
- Currently not collectible: The IRS may temporarily stop collection efforts if you are facing severe financial hardship. However, because penalties and interest continue to accrue while you are considered not collectible, you may also want to explore other options.
Why Working with a Tax Attorney Is Essential
Bringing in a business tax attorney early can help you avoid the worst consequences of business tax debt. Your attorney can assess your level of risk, look into your record-keeping procedures and financial records, and decide on the best path forward. They can also negotiate directly with the NYS Department of Taxation and Finance or IRS on your behalf, dispute personal assessments to protect you from liability, ensure ongoing compliance, and strategically defend you against aggressive collection efforts.
We know that personal liability for business tax debt can cause severe financial distress for business owners and officers. Let’s talk more about your options and how to proceed. Call us at 212-843-0050, reach out online, or chat with us on our website for an immediate response. You don’t have to navigate this alone.
Frequently Asked Questions
Can the IRS take my house for unpaid payroll taxes?
The IRS may take your house for unpaid payroll taxes, but that’s very, very rare and only happens after several steps are taken first. First, the IRS must find you personally liable for the debt and assess the Trust Fund Recovery Penalty. Then, they have to attempt to collect from you–and they try to enforce collection in several other ways before targeting your personal residence. If they have no other options, they may look at your home. This is a very remote risk, but it is possible, so you should address this issue early.
Am I personally liable for my business’s sales tax debt?
The NYS Department of Taxation and Finance may hold you personally liable for your business’s sales tax debt. They tend to pursue these debts aggressively, so you should attempt to resolve the issue when you first start receiving notices.
Does forming an LLC protect me from IRS collections?
Not necessarily. If the IRS believes that the LLC is your alter ego, they can personally pursue you for business tax debt. They may do this if you do not keep your business finances separate, pay for your own expenses from business funds, or otherwise indicate that the business is basically an extension of yourself. However, if you’re a single-member LLC or a multi-member LLC that files taxes as a sole prop or partnership, you are personally liable for the income taxes related to the business by default.
What is the Trust Fund Recovery Penalty, and how can I fight it?
The Trust Fund Recovery Penalty is assessed when trust fund taxes go unpaid. The IRS determines who is responsible for ensuring that those taxes are paid and then assesses the penalty, which is equal to 100% of the amount owed. You can fight this by proving that you are not a responsible party in this scenario. This may involve showing that you do not have control over the company’s finances or that you were intentionally kept out of financial matters.
Resources:
https://www.irs.gov/irm/part5/irm_05-017-014
https://www.tax.ny.gov/enforcement/collections/levies.htm
https://www.tax.ny.gov/enforcement/
https://www.tax.ny.gov/enforcement/collections/oic.htm
