What should I do if I have an irs tax lien filed against a closed business?

This is a response to another question emailed to us.  The answer is complicated, but we’re trying to provide information that is useful and thorough.  Thanks for asking!  If this post generates any other questions or comments, please post them here, email them to vvalenzuela@novafinancialgroup.com, or call us at 800.337.9629 x306.  If you call please let us know you’re calling in response to a blog post.

The answer to this question depends on many factors:

• What type of entity was your business (Corporation, LLC, Sole Proprietorship);
• How were business assets disposed of when operations shut down;
• Have all the tax returns been filed and marked as “Final” returns.

These are just a few of the numerous issues that can impact your responsibility for federal tax liability from a closed business. Generally speaking, when a business closes the IRS will look to collect as much revenue as possible on any outstanding tax liability. This includes trying to collect on the sale of any business assets (A question of Lien Priority- discussed in detail in our previous Blog Post), trying to collect directly from any active business bank accounts and trying to hold the business owner personally liable for all or a portion of the tax debt.

For arguments sake (and to limit the scope of the response), let’s assume the business was closed with no equity in assets and no funds in the business bank accounts. In this scenario, the IRS will attempt to hold the business owner personally liable for the closed businesses tax debt.

Personal Assessment of Business Tax (aka Trust Fund Recovery Penalty for IRS 941 payroll taxes.)

If you operated the business as a Sole Proprietorship, there is no legal distinction between your personal assets and the businesses assets. Therefore, even though the business may be closed, you will still be personally responsible for the entire balance of the taxes due as well as penalty and interest. This is just one of the many reasons we never advise our clients to operate as a Sole Proprietorship.

However, if you have established the business as a Corporation or Limited Liability Company, the IRS must take specific measures to pierce the Corporate Veil and assess you personally with a portion of the tax debt. This is know as a Trust Fund Assessment.  Even the IRS must respect the legal protections created by the formation of a Corporation or LLC. Debts accrued by the business do not pass through directly to the owners. The IRS does have some power in this situation- they can pierce the Corporate Veil and assess what is called the “Trust Fund Recovery Penalty” against individuals they deem legally “Willful and Responsible” for collecting but not remitting employment taxes. To be clear- not all tax debts are considered “Trust Fund” taxes by the IRS. The IRS cannot pierce the Corporate Veil for:

• Corporate Income Tax; 1120 taxes
• Unemployment Tax; 940 taxes
• Business Matching Portion of Employment Tax;
• Interest that has accrued;
• Tax Penalties they have assessed.

The Trust Fund portion of the taxes is only the portion of the Employment Tax that should have been withheld from employee paychecks & turned over to the IRS. The Collections Division of the IRS will work to assess all Corporate Officers it deems “Willful and Responsible” for collecting these taxes. The Trust Fund Recovery Penalty is a joint and several liability, meaning that if the IRS finds 4 people responsible, all 4 will be assessed the entire penalty. However, if one person pays off the debt entirely, it pays it off for the other three as well. As a taxpayer, you have many different Appeals rights through the process of assessment of the Trust Fund Recovery Penalty- and there are often many things the IRS does wrong. We strongly advise you work with a competent professional to ensure your rights are protected.

One final note about the Trust Fund Recovery Penalty- it is important to realize that the IRS  only has 3 years to assess the debt to an individual. This date starts from when the tax return is filed. If your business has been closed for more than three years, or it has been more than 3 years since you business accrued any tax debt, the IRS may have missed their opportunity to pierce the corporate veil and cannot assess you with any portion of the business taxes. This is only true if you have filed your returns.  Substitute For Return (SFR) is what the IRS files when you do not.  SFRs do not start the statute.  SFRs are also known as arbitrary assessments.    In this scenario, the entire tax liability “dies” with the closed business and you can move on with your life. Please note- we have seen the IRS attempt to assess Trust Fund beyond the 3 year limit. This is just another of the many reasons that we always advise you work with a professional when dealing with the taxing authorities to ensure your rights are protected to the fullest extent of the law.

This post is intended to give general information about lien filings and tax obligations of closed businesses and business owners. Your situation may be significantly more complicated. If you have any questions at all, please contact us immediately for a free consultation.