Corporate Officers Beware: Personal Liability and Unpaid Michigan Tax
Debt collection is not usually a pleasant experience. If you own your own business, depending on the type of business entity you’ve chosen, like a corporation or LLC, you are granted a layer of protection from business debts. But, the asset protection benefits of forming a separate business entity will only get you so far. If you’re an officer of a corporation or manager of an LLC in the State of Michigan, there’s a chance you could be liable for the business’s tax debts.
Because corporations and LLC’s are their own legal entities, when one owes a debt, the creditor can generally only collect from the entity itself. Absent some special circumstances, creditors generally can’t go after the personal assets of the owners of the company to satisfy a business debt. However, as there are many exceptions to every rule, different limits apply in Michigan. Sometimes, the State of Michigan will go after personal assets– and they don’t go easy on you either. In Michigan, if a business falls behind on its State taxes, the State will hold the officers of the corporation personally liable for the debt. This is called Corporate Officer Liability (COL).
How the Process Works
The Corporate Officer Liability in the State of Michigan begins when a corporation fails to file returns and/or pay taxes due to the State of Michigan. Department of Treasury staff will perform an investigation so they can identify who may be held personally liable for the corporation’s failure to file returns and/or pay off their debts. Based on the documents during the investigation, the Department will issue a Letter of Inquiry to all those who are potentially liable. Based on that letter, you have 30 days to submit documentation to prove you are not involved with the corporation, an officer, and responsible for paying Michigan taxes or filing returns on behalf of the corporation. If no documents are submitted or they are inefficient, a bill will be sent for taxes due. The bill notifies the person that the Department intends to hold them personally liable for the taxes in question. The person may dispute the request within 60 days on the date on the Bill for taxes due.
If the Department doesn’t receive any payment, installment agreements, or an approved notice of appeal, the State of Michigan will send your file off to their collection agency, which will viciously come after you to collect the debt. Here’s what they can do: Levy wages and bank accounts, place liens on real/ personal property, intercept money owed to the individual by the state (like income tax refunds.) What this means is, even if the business closes down and/or files for bankruptcy, the owners and/or officers of that company will still owe whatever unpaid taxes are left. The state can come after anything and everything you own to collect those taxes (your house, car, bank accounts, retirement accounts, etc.) Even if you were an officer of a corporation previously, but are no longer involved, you could still be held liable. This refers to the taxable period in question. So, if you began a business 5 years ago and it failed miserably, you could still be held liable for it, even if you filed for bankruptcy or sold. Also, if you weren’t an officer when the tax debts accrued, and became an officer later, you may still be held liable if you knew about the debt and did not force the company to pay it.
State of Michigan Corporate Officer Liability vs. Trust Fund Recovery Penalty
There is personal liability for some taxes at the Federal level, but Michigan is way more aggressive than the IRS when it comes to this area. Generally speaking, the IRS can only hold corporate officers liable for a relatively small portion their company’s payroll taxes. The IRS calls this the Trust Fund Recovery Penalty, and it only applies to the money that was withheld from an employee’s paycheck for taxes and not paid over to the IRS, and that’s it. It does not apply to the company’s share of the payroll taxes, penalties, or interest on the payroll tax debt. Most states have laws very similar to the IRS, but unfortunately not MI. In Michigan, if a business falls behind on ANY of its taxes, the State will assess the full amount against the responsible parties. They will come after you for all the tax, penalties, interest, collection fees, and whatever else they decide they want to charge you. In some cases, penalties and interest on the taxes are often more than the tax themselves. The circumstances won’t matter to the State of Michigan; all they are concerned with is collecting money. If you are or were previously involved in a business that has fallen behind on its taxes, don’t wait. Contact us before it’s too late!