If the Company Cannot Pay Every Bill, Could Michigan Come After You Personally?

The taxes that create the greatest personal exposure

Michigan’s responsible-person rules generally concern taxes the business collects from, or on behalf of, someone else and is expected to remit to the State. These include sales tax, employee income-tax withholding, certain use taxes, tobacco and motor-fuel taxes, and other taxes collected from third parties for remittance.

Michigan Corporate Income Tax and Michigan Business Tax generally are not subject to this particular form of officer liability because they are not collected from third parties. That distinction matters. Money collected as sales tax or withheld from employee wages should not be treated as ordinary working capital simply because it is sitting in the company’s bank account.

“We had to make payroll” may not end the inquiry

Treasury’s guidance describes a responsible person as someone who held a covered position during the period of default; controlled, supervised, or was responsible for filing the return or paying the tax; and willfully failed to file or pay.

“Willfully” does not necessarily mean fraud or an intention to violate the law. Treasury says it can include knowing—or having reason to know—that the tax was due and intentionally or recklessly failing to pay it. The guidance goes further: paying another debt, including payroll, while knowing an applicable tax remains unpaid may support a finding of willfulness. Delegating tax responsibilities to a bookkeeper, controller, payroll company, or outside accountant does not by itself eliminate the risk.

For an owner trying to keep employees working, that can feel brutally unfair. Payroll protects families. Suppliers may be threatening to stop deliveries. A lender may be sweeping the operating account. Every choice appears necessary. But distress does not make all obligations legally interchangeable. When collected or withheld taxes are involved, the order in which cash is used can have consequences for the individuals making the decisions.

Titles alone do not determine responsibility

Not every officer or owner is automatically a responsible person. Actual authority and conduct matter. Treasury must establish the required elements, and an assessed individual may challenge both responsible-person status and, in appropriate circumstances, the underlying business assessment.

Signatures on tax returns or payment instruments can create important presumptions. Other evidence may include company registrations, audit records, payment agreements, contracts, agency filings, and documents showing who controlled tax filing and payment. This makes contemporaneous documentation important. When several owners, officers, financial professionals, or turnaround personnel are involved, ambiguity about who possessed authority can become expensive later.

The updated guidance also discusses “de facto” officers—people who were not properly appointed but assumed an officer’s duties or held themselves out as officers. A title omitted from corporate records is therefore not necessarily protection if the person exercised the corresponding authority.

A bankruptcy filing does not necessarily erase the issue

Business owners sometimes assume that a bankruptcy filing will place all unpaid company taxes inside the bankruptcy case and end their personal exposure. Treasury’s guidance says otherwise. A responsible person may still be assessed for qualifying liabilities incurred before the filing.

If the company remains a debtor-in-possession and no trustee is appointed, the individuals controlling tax filing and payment may also remain exposed for post-filing failures. That is one reason tax compliance must be treated as an operating priority during a restructuring—not merely as a historical claim to be sorted out later.

The Maxwell Dunn perspective

The most dangerous moment is not necessarily when the company has no money. It is when leadership knows cash will not cover every obligation but continues making payments without a coordinated legal and financial plan.

That is the point when the business should determine which liabilities involve collected or withheld funds; whether all required returns are current, even if full payment is impossible; who actually controls filing and payment decisions; whether an appeal, installment agreement, restructuring, or other intervention is available; what records should be preserved concerning authority and payment decisions; and whether a proposed asset sale requires tax clearance, escrow protection, or successor-liability analysis.

Treasury’s guidance states that it will not assess responsible persons while a qualifying installment agreement remains in good standing. A default, however, can reopen that exposure. An agreement therefore needs to be realistic, not merely sufficient to delay the immediate problem.

What trusted advisors should watch for

For accountants, lenders, and other trusted advisors, the warning signs deserve escalation: missed sales-tax payments, unpaid withholding, late returns, recurring cash sweeps, informal owner loans, or management choosing payroll and vendors without separately accounting for trust-type taxes.

The responsible response is not panic. It is early coordination. A business may still have options. But owners and advisors should understand which decisions can follow the decision-makers home.

This article provides general information and is not legal or tax advice. Application of Michigan’s responsible-person rules depends on the specific facts, tax periods, authority structure, and procedural history involved.