The state tax authorities can be more aggressive than their federal counterparts when assessing and collecting taxes, particularly in collections. It is often advised to pay state taxes while haggling with the IRS about federal taxes.
This does not necessarily mean that the state will always prevail, as there are cases where they do not, such as the Hanson v. Colorado Department of Revenue, No. 04CA2292 (Colo. Ct. App. 2006) case. The case involves a tax penalty that the state tried to impose on the president of a corporation for unpaid taxes.
Facts & Procedural History
Hanson was the president of the Internet Commerce and Communication Corporation (ICC). The state of Colorado had assessed delinquent sales and wage taxes against ICC for failure to pay $43 thousand dollars in Colorado taxes. ICC filed for bankruptcy and there were not enough assets in the bankruptcy estate to satisfy the tax owed to the state. The state then imposed a penalty on Hanson equal to 150% of the delinquent taxes of ICC.
The applicable Colorado statute reads as follows:
[With an exception not relevant here] any director or officer of a corporation … in the process of dissolution or which has been dissolved who distributes the … fund in his control without having first paid any taxes covered by this article due from such … corporation … shall be personally liable to the extent of the property so distributed for any unpaid taxes of the … corporation … covered by this article which may be assessed within the [statutory time limits].
C.R.S. § 39-21-116(2) (2005).
In addition to the personal liability provided in section 39-21-116, all officers of a corporation … required to collect, account for, and pay over any tax administered by this article who willfully fail to collect, account for, or pay over such tax or who willfully attempt in any manner to evade or defeat any such tax, or the payment thereof, are subject to, in addition to other penalties provided by law, a penalty equal to one hundred fifty percent of the total amount of the tax not collected, accounted for, paid over, or otherwise evaded. An officer of a corporation … shall be deemed to be subject to this section if the corporation … is subject to filing returns or paying taxes administered by this article and if such officers of corporations … voluntarily or at the direction of their superiors assume the duties or responsibilities of complying with the provisions of any tax administered by this article on behalf of the corporation….
C.R.S. §39-21-116.5 (2005).
It was the state’s position that this penalty could be imposed on any corporate officer regardless of whether the officer was responsible for or had the ability to ensure that the tax payments were timely remitted.
Only Compliance Employees Penalized
Hanson argued that the penalty should only be imposed on officers who are responsible for tax compliance and who willfully fail to collect, account for and pay over the tax, as outlined in the statute. The trial court agreed with the state and found Hanson personally liable for the penalty.
Hanson then appealed the decision to the Colorado Court of Appeals, arguing that the trial court had erred in its interpretation of the statute. The Court of Appeals ultimately agreed with Hanson, finding that the statute only applied to officers who were responsible for tax compliance and who willfully failed to collect, account for, or pay over the tax. The court held that the state had failed to present any evidence that Hanson was responsible for ICC’s tax compliance or that he had willfully failed to collect, account for, or pay over the tax. The court, therefore, reversed the trial court’s decision and held that Hanson was not personally liable for the penalty.
The Takeaway
This case demonstrates that even though state tax authorities can be aggressive in their efforts to collect taxes, they are still bound by the applicable statutes and case law. It is important for taxpayers to understand the applicable laws and regulations in their respective states and to seek the advice of a tax professional when facing a tax controversy.
Taxpayers should also be aware that penalties may be imposed on corporate officers who are responsible for tax compliance and who willfully fail to collect, account for, or pay over the tax. However, as the Hanson case illustrates, the imposition of such penalties is not automatic and will depend on the specific facts and circumstances of each case.
In 40 minutes, we'll teach you how to survive an IRS audit.
We'll explain how the IRS conducts audits and how to manage and close the audit.