The State of Michigan recently enacted Public Act 3 of 2014, amending MCL 205.27a (among other statutes) relating to Responsible Person Liability for Michigan taxes. These amendments, as summarized below, will have a substantial impact on businesses and business owners in the years to come.
"Responsible Person" Further Defined
The prior Michigan law was ambiguous with respect to who could be classified as a “responsible person.” This often led to persons, such as clerical office employees who may have had the authority to sign checks but no authority to determine how business funds were to be directed, being assessed and held personally liable for unpaid tax liabilities of the business. The amendments to MCL 205.27a now include a more detailed definition of “responsible person”, which reads in substantial part as follows:
A responsible person means any officer, member, manager, or member-managed limited liability company, or partner for the business who controlled, supervised or was responsible for the filing of returns or payment of taxes administered under this Act during the time period of default and who, during the time period of default, willfully failed to file a return or pay the tax due on any of the taxes described in the Act. The signature, including electronic signature, of any officer, member, manager or member-managed limited liability company, or partner on returns or negotiable instruments submitted in payment of taxes of the business during the time period of default is prima facie evidence that the person is a responsible person, except that at signature, including electronic signature, on a return or negotiable instrument submitted in payment of the taxes after the record time of default is not prima facie evidence that the person is a responsible officer.
The amendment is significant as it sets forth the premise that to be a responsible person under the Act, the person must:
(a) “willfully” have failed to file a return or pay a tax, and
(b) failed to file a return or pay a tax within the record “time period of default”.
Under the Act, the term “willfully” means the person knows or had reason to know of the obligation to file a return or pay the tax, but intentionally or recklessly failed to file the return or pay the tax.
The term “time period of default” means the tax period for which the business failed to file the return or pay the tax due…through the later of the dates set for the filing of the tax return or making the required payment.
The addition of the willful requirement places an additional burden on the Department of Treasury when looking to assess an individual of the business for failure to file a return or pay a tax that is due. The language limiting liability for an unfiled return or unpaid tax to the specific time period that the return or tax was due also may act to shield prior or future officers, members, managers or other supervisory persons within a business from incurring or being assessed liability for actions taken (or not taken, as the case may be) when they were not serving in such capacity.
The amendments to the Act also require that the Department first assess and try to collect from the business or subsequent purchaser of the business before assessing a responsible person for the tax liability.
Additional protections afforded by the amendments include:
- The Department must first provide prima facie evidence that the person is a responsible person under the Act;
- The Department must provide a responsible person who is assessed with notice of any amounts collected by the Department from any purchaser or succeeding purchaser determined to be liable, or from any other responsible person assessed;
- The Department may not assess a responsible person under the Act more than four years after the date of the assessment issued to the business; and
- A responsible person may challenge the validity of the assessment against him to the same extent that the business could have challenged that assessment when originally assessed against it.
This alert is only a brief summary of the new law. We have the knowledge and experience to guide you through every facet of the issues your business faces to help you meet the challenges of today’s marketplace.
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