A federal district court just held a corporate officer personally liable for $1,880,987 in his company’s unpaid taxes — not because he underreported income, not because he ran a scam, but because he helped the company pay off a different creditor while it owed the IRS. That’s the whole violation. The company was insolvent, he knew about the tax debt, and he still moved money out the door to someone else first.

This is the Federal Priority Statute, 31 U.S.C. § 3713, and most business owners have never heard of it. It’s older, broader, and in some ways scarier than the payroll-tax trust fund penalty I’ve written about before — that one only reaches unpaid payroll taxes. This one reaches any unpaid federal tax debt, and it reaches anyone who acted as a “representative” of the business — officers, directors, whoever was steering the ship — the moment they choose to pay someone else while the government’s claim sits unpaid and the company can’t cover everyone.

Here’s how the government proves it, and how straightforward the test actually is. Three things: there’s a debt owed to the United States, the business was insolvent at the time (liabilities exceeded the fair market value of assets — a straight balance-sheet test), and there was a transfer of company assets to another creditor while that insolvency existed. Hit all three, and whoever caused that transfer to happen is personally on the hook — not for a slice of it, for the full unpaid federal debt.

In the case that just came down, the company owed the IRS roughly $1.4 million after an audit disallowed a set of related-party loan deductions. While that case was still working through the system, the company’s advisers — including the officer who ran the day-to-day — built an elaborate repayment plan and used it to pay off $8.8 million owed to a different, affiliated lender. Seven wire transfers, over $8.8 million moved, and the IRS never got paid. The court didn’t care that it was a complicated intercompany arrangement designed by lawyers and accountants. It cared that the company was insolvent, the officer knew the IRS was owed money, and he helped move the cash to someone else anyway. Judgment: $1,880,987, personally, against him.

Translate that into a story I actually see: a business hits a rough stretch. Revenue’s down, a payroll tax deposit or a quarterly estimate slips, and the IRS balance starts building. Meanwhile there’s real pressure to keep a key supplier paid, or a landlord, or a personal loan a family member made to the business. You pay the people yelling the loudest and figure you’ll catch up with the IRS next quarter. If the business is genuinely insolvent when you make that call — liabilities bigger than what the assets are actually worth — you may have just made yourself personally liable for the company’s entire federal tax debt, on top of whatever the business itself still owes.

If your business is behind with the IRS and you're also juggling other creditors, the order you pay them in actually matters — legally, not just practically. Talk to me before you decide who gets paid next. It's a lot cheaper than fixing it after the fact.

Your entity structure doesn’t save you here. An LLC or an S-corp shields you from a lot of business liabilities, but this statute reaches the individual who caused the preferential payment, regardless of what the org chart says. Being “just the president” or “just handling the books” doesn’t get you out of it either — the court has repeatedly found that anyone with real authority to sign contracts, move money, and manage the business counts as a representative under the statute.

The fix isn’t complicated, it’s just uncomfortable: if your business owes the IRS and is genuinely struggling to pay everyone, don’t quietly prioritize other creditors and hope it sorts itself out. Get a real read on where the business stands — assets versus liabilities, not just cash in the checking account — before any large payment goes out to anyone other than the government. If the numbers are tight, an installment agreement, an offer in compromise, or restructuring how you’re paying down the tax debt is a far better move than making a payment decision today that follows you home personally next year.

I help business owners work through IRS balances, prioritize payments, and stay personally protected while a business gets back on solid ground. Book time with me before your next big payment decision, not after.

This post is general information, not legal advice for your specific situation — personal-liability rules under federal law are fact-specific and the stakes are high. Talk with your accountant and, where a business is genuinely insolvent, a bankruptcy or tax attorney before deciding who gets paid next. Geiger Tax & Accounting, Amityville, NY. (631) 532-5622 · info@geigertax.com · Client portal: geigertax.taxdome.com