Closing a Business That Owes Taxes: 6 Ways the Tax Debt Outlives the Company

If a tax liability is left on the table when closing a business, the tax agency can continue its collection actions until the debt is paid. You may be personally liable for the tax balance even after the business itself is out of existence. The tax debt can follow owners, responsible parties, and entities they are connected with. This is a part of business law that some entrepreneurs might not expect.

When a business ceases operations, the IRS account continues to be an active account until every tax return that is required is filed and every tax owed is paid. Until then, its former responsible parties must take an active approach to address past problems as though the business is still operating. Beware your payroll-tax obligations. The final Form 941 or 944, whichever form you use, needs to be filed for the last quarter you have wages. Check the box indicating the business is closed. Also attach a statement explaining who now has the payroll records and where they can be found.

Personally Liable for the Full Balance

When payroll taxes haven’t been paid to the IRS, the “responsible parties” of a business can be held personally liable for the full balance. Payroll taxes are a trust fund expense, meaning that the business holds them on behalf of the government. Multiple people can be found liable for this Trust Fund Recovery Penalty, such as board members, officers, responsible shareholders, those who sign checks, and more. Once the IRS goes after these responsible parties, each person can be held liable for 100% of the debt.

To the IRS, ‘willful’ nonpayment doesn’t necessarily mean evil intent. It can be as simple as paying creditors other than your payroll taxes. The general rule: If a worker is told to write checks but had no authority to decide who got paid, he or she is not responsible. The IRS first mails you a letter proposing the penalty. You have 60 days from the date of the letter to file an appeal, but ignore it and the penalty is assessed. That can open the door to the IRS tax lien, then a levy or seizure of your personal assets to pay the debt.

For certain types of businesses, the state sales tax debt can be pursued against owners and responsible parties after the business ceases operations. New York state can hold the business owner personally liable for failure to pay, even if the accounting was turned over to someone else. If there is an unpaid tax, even an LLC or corporation offers no protection for the responsible person’s personal assets. California can hold a responsible person personally liable if the corporation or LLC dissolved or abandoned its business and the responsible person willfully failed to pay sales tax, and the state has up to eight years from the date the business ended to assess this person.

Federal tax liens last until the debt is paid or the time runs out. Dissolving the business doesn’t end the lien. The IRS generally has 10 years after assessment of the tax to collect. Certain events can pause the clock on how long the IRS has to collect. Once you are personally liable for unpaid payroll taxes, the IRS and state can make good on it by putting a levy on your bank accounts, garnishing your wages, taking other tax refunds, even seizing any interest you may have in real estate and vehicles (including those you own jointly with others). In New York, your driver’s license can be suspended.

The IRS can pursue the owners if they have taken company assets at liquidation, by assessing them as transferees. The IRS has up to a year after the company’s assessment deadline to determine whether there is a transferee liability, and in counting that time the IRS can treat the dissolved company as if it had never been dissolved.

When you are a sole proprietor, your business debts are simply your own debts; there is no legal distinction. In a general partnership, each partner is personally liable for the business debts, and each partner is personally liable for payroll taxes. But LLC members taxed as a partnership are not directly liable for employment taxes in the same way. Still, the LLC can’t shield you from what is called a “responsible person” assessment for nonpayment of trust fund taxes.

On paper, an LLC or corporation is a separate person from its owners. But the IRS can disregard the legal distinction and treat the business as your alter ego if you commingle personal and business money, skip the corporate formalities, pay personal bills from the company, or move assets out of the company without paying for them. Then your business taxes would be your own.

Voluntary Resolution

What you do to resolve the debt is crucial. You should file every tax return due on time, even if you cannot pay on time. You should also answer all agency notices and telephone calls promptly. Agencies generally prefer to work with you toward a voluntary resolution rather than forced collection. In general, you can work out an installment agreement with the IRS or with New York on the balance you owe. You can also make an offer in compromise, if full payment presents a real financial hardship. You can seek penalty relief if the reason you owe is reasonable, and you can appeal an assessment that you consider wrong. You can ask to have the account put in a ”currently not collectible” status; interest continues to grow, though.

Criminal Charges Are Unlikely

If you are stuck with business tax debt, you may wonder: Can this lead to jail time? The truth is that criminal charges are unlikely unless you can be shown to have defrauded or evaded the agency with intent. The critical stage in resolving a balance is early on.