When someone makes the decision to close a business, it is one of the toughest decisions they will hopefully ever have to make in their life. Nobody goes into business imagining that one day they will be facing a list of debts and weighing a list of pros and cons that will ultimately lead to the dissolution of something they had hoped would be a smashing success. Let’s talk about how a tax debt factors into this scenario.

First, we need to consider what type of entity the business is. If it is a sole proprietorship, the owner is 100% liable for all debts of the business; the business is viewed as simply an extension of the individual. It also means that any avenues the individual has to address the debt will need to be utilized, whether that be tapping a personal investment or liquidating equity in an asset.

If the entity is an LLC, partnership, or corporation, there is a separation between the individual(s) and the business. It is expected that the business entity accesses all options available to address the outstanding debts before officially closing. This is achieved through the collection and application of outstanding accounts receivable, liquidation of equipment or inventory, sale of real estate holdings, etc.

It is important to maintain integrity with the application of those monies/resources. Any debtor with a lien filed needs to be addressed first. Your buddy Jimmy who owns the company your business purchased supplies from may be upset about this, but legally, you MUST address the debts in this manner. The priority creditors can be banks or mortgage holders, any business you engaged in that resulted in the filing of mechanic’s liens, tax agencies with tax liens recorded, any lawsuits with a court order for repayment, etc. Once those are addressed, some debts will simply “die” with the closure of the business. This includes tax debt, though it’s not always a cut-and-dry termination of debt (more on this in the next section).

The second big component we need to consider is what type of taxes remain unaddressed at the time the business stops operating. Income tax and associated penalties will become uncollectible when the business is closed; they simply “die” with the entity if funds were not available to be applied toward the debt. For trust taxes (payroll, sales tax, or any similar type of tax that is collected from someone else by the business), there is always personal responsibility assessment exposure for those who were involved with making financial decisions on behalf of the business. If the business is not able to address those debts in full prior to closing, the IRS or state will conduct an investigation into who should be held personally responsible.

The two words that are used as the guiding points for this process are “willful” and “responsible.” They allow the IRS or state to assess who should have been overseeing the collection and payment of the taxes, who made the decision(s) not to pay the taxes, who had access to the bank accounts and credit cards in the business’ name, and who signed tax returns and/or checks in the business’ name. The IRS and state will then hold those deemed “willful” and “responsible” personally responsible for a portion of the tax debt owed. At that point, the tax agencies will turn their attention to recouping the taxes from those individuals personally.

Closing a business is one heck of a tough decision to make, and having a tax debt that needs to be addressed can make it feel one thousand times more difficult. If this is your situation, reach out to the Golden Lion Tax Solutions team. With over twenty-four years of experience handling delicate tax debt situations like this, we have the knowledge and experience necessary to make sure your interests are best represented and the most advantageous solution is correctly identified and relentlessly pursued.

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Trust. Protection. Wisdom.

Your future and your family deserve the right protection. Golden Lion Tax Solutions will be your advisor and confidant throughout the entire journey. We guarantee to offer you or your business best-case solutions for your tax debt. We are by your side every step of the way. Start now and get your life back.

For help with your tax debts, email contactus@goldenliontaxsolutions.com or call 833-LION-TAX (833-546-6829)

Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.