State of the Economy?
According to statistics released by the Administrative Office of the U.S. Courts for the twelve-month period ending Dec. 31, 2025, bankruptcy filings by businesses rose 7.1 percent and non-business filings increased by 11.2 percent. Total filings have increased each quarter since June 2022, though they remain lower than historical highs.[i]
Do these statistics somehow reflect the state of the U.S. economy, generally?
Reasons for Concern
Many economists believe the economy is showing signs of weakening. Growth has been lower than anticipated. The labor market is stagnant. Consumer confidence has been trending downward. Inflation is “below its peak but stubborn”[ii] (thanks in no small part to the cost of energy). The personal consumption expenditure index has been trending upward, but disposable personal income has been falling,[iii] which may explain why America’s total credit-card balance stood at $1.25 trillion in the first quarter of this year, and the percentage of credit-card balances that were at least 90 days delinquent rose to 13.12 percent.[iv] Total student loan debt is at $1.833 trillion.[v] Insofar as interest rates are concerned, the Federal Reserve is expected to remain in its current holding pattern.[vi]
Public Market
Against the foregoing, the stock market continues to perform well, posting a 10.73 percent year-to-date return, which reflects investor confidence in the economy, and the average annual total return has been nearly 16 percent over the past 10 years.[vii]
That being said, stock market ownership is heavily concentrated at the top. According to Federal Reserve data, the wealthiest 10 percent of U.S. households own roughly 90 percent of all stocks. The top 1 percent accounts for more than half of public equity holdings, while the bottom 50 percent holds a very small share of overall stock market wealth.[viii]
Private Companies
However, economic activity in the U.S. is increasingly concentrated in private businesses.[ix] These closely-held, middle market companies have “shown continued, albeit slowing, revenue and earnings growth” over the last several quarters, including the first quarter of 2026.[x]
In addition, according to the Federal Reserve’s Small Business Credit Survey,[xi] most small businesses continue to see steady or increasing revenues, with only 12.1 percent reporting a decline.
Taxes
Looming over the foregoing mix of somewhat confusing and difficult-to-reconcile data is one factor that may easily swing the economic pendulum in a direction that most business owners would rather defer[xii] for as long as possible, if not avoid altogether.
Of course, I am referring to the very real possibility – or should I say “the inevitability” – of federal and state tax increases in the not-too-distant future.
What’s the Point?
Most of us have experienced such swings – tax-induced or other – and have witnessed the adverse economic consequences felt by many small-to-mid-sized businesses.
When increased tax burdens are combined with the costs[xiii] of new technologies, stubborn inflation, high borrowing costs, a scarcity of workers,[xiv] the financial strains and psychological distress caused by what may be described as a destabilized and divided society, and an ever more threatening world, it is not all that difficult to understand why many owners may be fearful for the future of their business.
Staying Alive
Under such circumstances, business owners will generally do what they can to keep their businesses viable. Although the great majority of owners will remain within the boundaries of the law, a not insignificant number may consider, and ultimately follow through with, a “strategy” that is often utilized by businesses in distress.
Specifically, such a business may intentionally fail to remit to the taxing authorities those taxes that the business has withheld or collected on their behalf – typically, an employee’s share of employment taxes on wages paid by the employer-business, as well as state and local sales taxes.
Why would a business engage in such behavior? The reasoning goes something like this: “Revenues were down. We just needed some time to recover – the tax dollars withheld were going to pay expenses and help us sustain the business until it became profitable once again. At that point, we would have paid the back taxes owing.”
As you can imagine, it rarely works out that way, the business fails, and the owners are left holding the proverbial bag. In more cases than not, it’s difficult to argue that they shouldn’t end up in that position, at least from a legal perspective, as illustrated by the subject of a recent federal district court opinion.[xv]
Avoid this Situation
Corp was founded by two unrelated individuals, Taxpayers A and B, each of whom owned 50 percent of the corporation’s issued and outstanding shares of voting common stock and served as its co-president.
For several years, Corp retained the services of a professional employer organization (the “PEO”), which leased its employees to Corp, administered Corp’s payroll, withheld employment taxes from the employees’ wages, remitted those taxes to the IRS, and issued forms W-2 to the employees for the compensation it paid them.[xvi]
At some point during the taxable periods in question, Corp terminated its arrangement with the PEO and hired another firm (“HR”) to assist it with its payroll. However, Corp’s relationship with HR was structured differently than with the PEO. Specifically, HR did not function as a professional employment organization; it did not lease employees to Corp. Instead, Corp hired its own employees and compiled payroll data that it would forward to HR, which HR then used to generate payroll checks which it delivered to Corp, and remitted any withheld federal employment taxes to the IRS on Corp’s behalf. HR then invoiced Corp for an amount equal to the employees’ wages and any corresponding withheld employment taxes.
Over time, significant discrepancies emerged between HR’s invoices and the amount Corp paid towards those invoices. This was because Corp’s checks did not always cover the full amount that HR invoiced. Eventually, HR informed Corp that it would no longer deposit Corp’s withheld employment taxes with the IRS; Corp would have to deposit those funds with the government directly. Not long after, the two companies parted ways.
The IRS Comes A Calling
Whatever problems Corp was experiencing then went from bad to worse. The IRS filed a notice of federal tax lien with the Michigan Department of State for Corp’s unpaid withholding and unemployment tax liabilities. The IRS also assessed Taxpayers A and B with civil penalty liabilities for failing to timely remit Corp’s withheld employment taxes to the government; the so-called “Trust Fund Recovery Penalty” that is imposed on specific “responsible persons.”[xvii]
A couple of years later, Corp declared Chapter 11 bankruptcy, and the IRS filed a proof of claim with the bankruptcy court for several million dollars of unpaid taxes. After objecting to the IRS’s proof of claim, Corp settled those objections with the government.
However, the IRS then filed suit to obtain a money judgment against Taxpayers A and B for the outstanding civil penalty liabilities to “protect the statute of limitations” on recovering those taxes. After entering into a stipulated judgment with Taxpayer A’s estate,[xviii] the IRS moved for summary judgment on the question of Taxpayer B’s liability for the assessed civil penalties.
Trust Fund Tax
The Court began its discussion by reviewing the obligation imposed on employers to withhold income and Federal Insurance Contributions Act (comprising Social Security and Medicare) taxes from employee wages and to deposit the withheld funds with the U.S. Treasury.[xix]
The Court stated that “An employer who fails to pay taxes withheld from its employees’ wages is . . . liable for the taxes which should have
been paid.”[xx]
It then explained that the government is authorized to “hold certain employers personally liable” for failing to remit trust fund taxes to the Treasury. Such personal liability for unpaid trust fund taxes attaches to “[a]ny person required to collect, truthfully account for, or pay over” the tax and “who willfully fails” to do so. The taxpayer, the Court continued, carries “the burden of proving by a preponderance of the evidence either that he is not a responsible person or that his failure to pay taxes was not willful.”
Responsible Person
According to the Court, whether someone is considered a person responsible for paying over such taxes to the government is a question that focuses upon the degree of influence and control which the person exercised over the financial affairs of the corporation; specifically, over the decisions to disburse funds and to decide the priority of payments to creditors.
The Court then reviewed the factors it would examine to determine whether a person is responsible for paying trust fund taxes to the government:
(1) an officer’s duties, according to the corporate by-laws;
(2) the individual’s ability to sign corporate checks;
(3) the identity of the officers, directors, and shareholders of the corporation;
(4) the identity of the individuals who hired and fired employees; and
(5) the identity of the individuals who are in control of the financial affairs of the corporation.
Significantly, the Court noted that a responsible person’s personal liability for the trust fund tax requires the existence of only significant, as opposed to absolute, control of the employer’s finances.
Having set forth the foregoing factors, the Court then considered Taxpayer B’s situation. The Court observed that Taxpayer B co-founded Corp’s business, owned one-half of its equity, and acted as its co-president. Taxpayer B had the authority to issue and sign corporate checks. He was the corporate officer responsible for providing Corp’s financial information to the corporation’s accountants so that they could prepare and file the corporate tax returns. He signed such tax returns.
“Perhaps most importantly,” the Court pointed out, Taxpayer B acknowledged in an earlier IRS Collection Information Statement (Form 433-B), under penalties of perjury, “that he was responsible for depositing [Corp’s] payroll taxes with the government.”
Based upon this statement by Taxpayer B, the Court dismissed his efforts to deny any responsibility for or authority over the employment taxes in question. “That type of evasion,” the Court explained, would violate the sham affidavit rule, which forbids a party from “creat[ing]a factual issue by filing an affidavit, after a motion for summary judgment has been made, which contradicts her earlier deposition testimony.” This same principle, the Court continued, “extends to previous tax documents – like the Collection Information Statement [Taxpayer B] executed –which is signed ‘under penalty of perjury.’”
Because of his “critical admission of responsibility in Collection Information Statement,” coupled with his role as Corp’s co-president and his status as a 50 percent shareholder, the Court found there was no genuine factual question as to whether Taxpayer B was a responsible person for purposes of the trust fund penalty.
Willful
Next, the Court considered whether Taxpayer B willfully failed to pay Corp’s trust-fund taxes to the IRS.
Willfulness exists, the Court stated, when the responsible person (1) had knowledge of the tax delinquency and knowingly failed to rectify it when there were available funds to pay the government, or (2) deliberately or recklessly disregarded facts and known risks that the taxes were not being paid.
Actual knowledge occurs when the responsible person “first becomes aware of a past due withholding tax liability after the liability has accrued” and “fails to use all unencumbered funds that come into his possession thereafter to pay the delinquent taxes.” For this purpose, funds are encumbered “only where the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability and [the] legal obligation is superior” to the government’s interest in the funds.
Recklessness occurs when the responsible person “disregards obvious or known risks that trust-fund taxes are not being paid to the Treasury and fails to investigate.”
The Court determined that Taxpayer B was aware of the trust fund tax delinquencies for all the assessed tax periods. Among other things, he signed Corp’s quarterly employment tax returns for the periods in question all of which showed withholding tax underpayments corresponding to the civil penalties the IRS later assessed against Taxpayer B.
Notwithstanding his knowledge of the underpayments, Taxpayer B continued to draw a substantial salary from Corp, and he borrowed funds from Corp. In addition, Corp continued its pay operating expenses, and to fund employee benefit programs. It also made loans to related entities owned by Taxpayers A and B.
Because Taxpayer B became aware of Corp’s unpaid trust fund taxes after they had already “accrued,” and he failed to use the unencumbered funds that came into his possession to “pay the delinquent taxes,” it was reasonable to conclude that he acted willfully.
In response to Taxpayer B’s argument that it was Taxpayer A who had insisted on paying Corp’s employees and vendors, and on making loans to commonly controlled entities, the Court pointed out that no one had compelled Taxpayer B to take such actions, or to take personal loans from Corp, instead of satisfying its delinquent trust fund taxes.
Moreover, the Court suggested that Taxpayer could have the following steps in response to Taxpayer A’s “directives”: he could have resigned from Corp, he could have shut down Corp, or he could have forced Corp to file for bankruptcy (which it ultimately did).
According to the Court, what Taxpayer B should not have done was keep the corporation operating as a going concern, thereby making the government an unwilling partner in a “floundering business.”[xxi]
Lessons “Learned”
Notwithstanding the long history of taxpayers failing to avoid the trust fund penalty, too many business owners remain intentionally ignorant, blindly positive, or incredibly knuckleheaded when it comes to withholding taxes.
Some still cling to the mistaken belief that they are protected by the corporate veil, others that their misdeeds will not be discovered.
Often, it is those “passive” investors who put their money at risk in the business but who insist on certain “safeguards”[xxii] that are surprised to discover they have doomed themselves to the status of a responsible person.
What, then, is a business to do?
The easy answer: make certain that the correct amount of tax is withheld and timely remitted – period.
If that is not possible, contact a tax adviser, which may, in turn, involve contacting the IRS to see how the problem may be addressed.
Of course, it may be that the business in question is no longer viable. In that case, the owners should acknowledge reality and act accordingly. That includes paying off the tax obligations owing to the government.
If the owners decide to pay another creditor instead, the door to personal liability has been opened. As the Court suggested, above, any officers or directors who object to such payments should resign, and rather noisily. An objecting owner should consider forcing a bankruptcy proceeding.
Before Things Get Bad
While the foregoing assumes the you-know-what[xxiii] has already hit the fan, there are measures that business owners should seriously consider implementing well in advance.
After all, it isn’t easy running a business. One has to deal with often difficult customers or clients, sometimes unreliable vendors or suppliers, always determined competitors, demanding creditors, a mixed bag of employees and, at times, uncooperative (even dishonest) or absent partners. During their free time, the owner focuses on the core business, and the reason they went into business in the first place – the services they provide or the product they manufacture.
Under these circumstances, it is necessary that various administrative duties be delegated to others and their responsibilities spelled out. That includes accountability for employment taxes; for example, who in the business is charged with overseeing the collection and remittance of withholding taxes, whose signature is required for disbursements over a stated sum, whose approval is needed for certain financial decisions.
Such delegation will not necessarily absolve the owner from liability for any unpaid withholding taxes, though it should reduce the risk of failing to pay these taxes. Thus, it is still important that the owners familiarize themselves with the tax obligations imposed upon their business, that they periodically check in with those to whom they have assigned the task of satisfying these obligations, and that they immediately address any errors, inconsistencies, and suspicions.
In the event the business starts to experience financial difficulties, it is imperative that its obligations for the collection and payment of withholding taxes is satisfied.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the firm.
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[i] https://www.uscourts.gov/data-news/judiciary-news/2026/02/04/bankruptcy-filings-rise-11-percent.
[ii] https://www.nerdwallet.com/finance/learn/state-of-the-economy.
[iii] This index follows the goods and services consumers buy and the price they pay for them. It also tracks changes in spending habits as prices fluctuate. https://www.bea.gov/news/2026/personal-income-and-outlays-april-2026.
[iv] https://www.wsj.com/personal-finance/credit/us-credit-card-debt-af5c7c77.
[v] https://educationdata.org/student-loan-debt-statistics.
[vi] https://www.jpmorgan.com/insights/global-research/economy/fed-rate-cuts.
Meanwhile, the federal government’s budget deficit is expected to be about $1.9 trillion for the current fiscal year, and the total national debt has surpassed $39 trillion. https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/; https://www.cbo.gov/publication/62105. In addition, the U.S. population is aging rapidly, and it won’t be long before Americans who are 65 and older will outnumber those 18 and younger. In other words, there will be fewer workers paying for the pensions of an increasing population of retirees. https://www.census.gov/library/stories/2018/03/graying-america.html.
[vii] https://www.chase.com/personal/investments/learning-and-insights/article/what-is-the-average-stock-market-return.
[viii] https://www.federalreserve.gov/releases/z1/dataviz/dfa/compare/chart/.
[ix] https://www.sciencedirect.com/science/article/abs/pii/S0047272725001641.
[x] https://golubcapital.com/wp-content/uploads/2026/04/26_Q1_GCMMR.pdf.
[xi] https://www.fedsmallbusiness.org/reports/survey.
[xii] Pun intended.
[xiii] And perhaps existential threat.
[xiv] But an abundance of employees who prioritize work-life balance over a hunger to succeed. The apparent absence of the proverbial “fire in the belly.”
[xv] U.S.A. vs Est. of Richard T. Cole, Jr., et al. (E.D. Mich. Case No. 22-cv-12916).
[xvi] All under the PEO’s own EIN.
[xvii] Pursuant to IRC Sec. 6672.
[xviii] That’s right. Taxpayer A did not survive the collection proceedings, but his personal liability survived his death – his estate could not escape Taxpayer A’s personal liability for the trust fund tax.
[xix] IRC Sec. 3102(a), 3402(a); Reg. Sec. 31.3102-1, 31.6011(a)-1, 31.6011(a)-4. “The withholding taxes are part of the wages of the employee, held by the employer in trust for the government; the employer, as a function of administrative convenience, extracts money from a worker’s paycheck and briefly holds that money before forwarding it to the IRS.”
[xx] The taxes withheld from an employee’s wages – with respect to which the employer acts as a fiduciary for the government – are to be distinguished from the employer’s own share of the employment taxes.
[xxi] Many years ago, an IRS agent told me the government wasn’t in the business of making loans to struggling businesses. I’ve repeated that statement to any number of such businesses, often to no avail.
[xxii] For example, input on major financial decisions, signature authority with respect to certain expenditures, etc.
[xxiii] Anyone familiar with the “Shaving Cream” song? No? You owe it to yourself. Here’s a teaser:
I have a sad story to tell you,
It may hurt your feelings a bit.
Last night when I walked into my bathroom,
I stepped into a big pile of … Shhhhhaving cream, be nice and clean,
shave every day and you’ll always look keen.