Closing a Business with Tax Liability
If your business has tax problems, can you simply close the company? Yes, of course you can shut down the business. However, the tax problems do not necessarily end with the closing.
Here is one item that you and your IRS tax attorney should discuss when considering terminating a business with tax debt.
Can I Just Start Fresh with a New Company?
This is an example of what business owners attempt to do:
The business is still ongoing with new customers every month. There is some tax liability, maybe from an IRS audit, over 100,000 dollars. The business can survive, but it can never repay that amount of back tax debt.
The owner incorporates a new company and tells the customers to pay the new company. Even the employees are paid under the new tax ID number. The old company and its IRS tax debt are abandoned. And life goes on!
What’s Wrong with That?
Yes, life goes on, but here is the problem: The business never really closed. Actually, all that happened was that the company assumed another identity, or an “alter-ego,” if you will. In this case, the new company simply stepped into the shoes of the old.
IRS will disregard transactions like the ones described above. There are several reasons why this is considered a “sham transaction.” By “sham transaction,” we mean a series of events that should be ignored. Consider the following that carried from the old business to the newly formed company.
• The same customer base continued, assumedly purchasing the same goods and services.
• The same employees continued, likely performing the same duties, receiving the same pay.
• There was no change in ownership, management, or operation of the business.
• The new business continued using the same assets (bank funds, receivables, computers, inventories, trucks, etc.).
• The new business honored some of the liabilities of the old company. But notably, it also chose to abandon some of the debt (IRS tax debt, credit card liability).
What Will the IRS Do?
Tax lawyers, CPAs, and IRS tax representatives should advise their clients on not just what the IRS will do. Clients need to know what the IRS can do in these types of situations.
IRS could treat this business “rebirth” as a sham or fraudulent transaction. It c
ould view the series of steps taken as an intentional act to evade tax. (If that sounds bad, that’s because it is. This is a felony, rewarded by possible imprisonment.)
The business, and possibly the owner, could be subject to a significant penalty. This penalty is applied to the old and new business so that it survives the rebirth. Neither the old nor the new business will be off the hook!
Also, IRS collection enforcement could be taken against the assets of either company or even the owner. IRS could levy either business cash and receivables and can even place a lien on the owners’ home and assets.
Is There a Better Way?
This article only discusses some of the pitfalls of closing a company with tax debt. However, similar related transactions can be completed successfully and lawfully.
My suggestion is to engage an experienced IRS attorney that handles these type of solutions. (Yes, what we do!) Without careful guidance, you will only put your business and yourself at risk of even worse consequences. To learn more information and tell us about your situation, we recommend reaching out to us today. We proudly serve Wheaton, Naperville, Downers Grove, and all surrounding areas.
Source: Jeffrey Anton Collins (Former IRS) is a Tax Attorney with Tax Law Offices