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Can the IRS Make Me Pay Unpaid Employment Taxes for My Closed Business?
When a business closes its doors, many owners breathe a sigh of relief, thinking their troubles are behind them. But what happens when the IRS comes knocking for unpaid employment taxes? It’s a question many Iowa business owners may not have thought about until they're faced with a notice from the IRS.
At The Law Office of James R. Monroe, our firm understands the nuances of running a business in Des Moines, Iowa. The issue of unpaid employment taxes can add significant pressure, especially if your business has already been dissolved.
Understanding Employment Taxes
First, let's clarify what we mean by employment taxes. As business owners, you're required to withhold federal income taxes, Social Security taxes, and Medicare taxes from your employees' wages.
These taxes, often referred to as "trust fund" taxes, are held by the business in trust for the federal government. Additionally, you're responsible for paying the employer’s portion of Social Security and Medicare taxes.
Failure to properly withhold and remit these taxes to the IRS can lead to severe penalties and interest on top of the original tax debt.
It’s important to remember that employment taxes aren’t just a business expense but a legal obligation. Iowa tax law follows federal tax laws in this regard, and failure to comply with these obligations could result in both state and federal consequences.
Can the IRS Hold You Personally Liable?
One of the most shocking realizations for many business owners is that the IRS can, in fact, hold individuals personally liable for unpaid employment taxes. This is true even if the business is closed. The IRS has a tool known as the Trust Fund Recovery Penalty (TFRP) which allows them to seek out individuals responsible for the non-payment of trust fund taxes.
The IRS defines a “responsible person” as anyone who has significant control over the company’s finances, including owners, officers, directors, and even certain employees. In the context of Iowa tax law, this means that if you were responsible for managing the business's finances or had the authority to make decisions regarding tax payments, you could be on the hook for unpaid employment taxes.
This penalty isn't limited to business owners; it can extend to bookkeepers, accountants, or any individual with control over the financial operations of the business.
Trust Fund Recovery Penalty in Iowa
Under federal tax law, which Iowa adheres to, the Trust Fund Recovery Penalty is one of the harshest penalties the IRS can impose. It can be equal to the total amount of unpaid employment taxes.
The IRS will first attempt to collect from the business itself, but if the business has been closed or dissolved, they’ll then turn to responsible individuals to recover the debt. This is why it’s crucial for you to understand the gravity of unpaid employment taxes.
In Iowa, business owners may also face state-level consequences for failing to remit employment taxes. While the Iowa Department of Revenue doesn’t impose a trust fund penalty as severe as the IRS, they do have the authority to collect state employment taxes, and penalties can accrue quickly.
What Happens After the Business Closes?
Many business owners may think that once a business is closed, their responsibility for its tax obligations ends. Unfortunately, that’s not the case when it comes to employment taxes. The IRS can continue to pursue the responsible parties for these unpaid taxes even after the business has been dissolved.
In Iowa, when a business closes, you're required to file a final tax return and report all outstanding tax obligations. If you fail to file this return or fail to pay the employment taxes due, the IRS can still come after you personally.
The statute of limitations for the IRS to collect employment taxes is generally 10 years from the date of assessment. This means that even if the business has been closed for several years, the IRS can still pursue collection efforts.
Steps to Take If You Owe Unpaid Employment Taxes
If you find yourself in the unfortunate position of owing unpaid employment taxes, it’s important to take action as soon as possible. Ignoring the problem will only lead to more severe penalties and interest. Here are some steps you can take:
Consult a Tax Professional: Working through tax law, especially when dealing with the IRS, can be overwhelming. A tax professional with experience in employment taxes can help you understand your options and develop a plan for resolving the debt.
File Any Missing Tax Returns: If you haven’t filed all required tax returns, it’s crucial to do so. The IRS won’t even consider settlement options or payment plans if your tax filings aren’t up to date.
Explore Payment Options: The IRS offers various payment options for businesses and individuals who owe taxes. You may be able to set up an installment agreement, which allows you to pay the debt over time. In some cases, an offer in compromise may be available, which allows you to settle the tax debt for less than the full amount owed.
Request Penalty Abatement: If you can show reasonable cause for the failure to pay employment taxes, such as illness, natural disaster, or reliance on a trusted employee who mismanaged funds, the IRS may be willing to reduce or eliminate penalties.
Consider Bankruptcy: While employment taxes are generally not dischargeable in bankruptcy, there may be exceptions in certain cases. It’s important to consult with a bankruptcy attorney who understands Iowa and federal tax law to determine if this is an option for you.
Iowa-Specific Considerations
In Iowa, there are a few specific considerations that business owners should keep in mind when dealing with unpaid employment taxes. First, if you had employees working in Iowa, you were required to withhold Iowa income tax from their wages. Failing to do so can result in additional penalties from the Iowa Department of Revenue.
Additionally, Iowa has a Business Property Tax Credit, which can provide some relief to business owners. While this credit won’t directly offset unpaid employment taxes, it’s worth exploring any tax relief options available to reduce your overall financial burden.
Iowa also participates in the federal-state tax offset program, which means that if you owe unpaid employment taxes to the federal government, the Iowa Department of Revenue may withhold any state tax refunds or credits you're due to pay off the federal debt.
What Happens If You Don’t Pay?
Failing to pay unpaid employment taxes can have severe consequences. The IRS has powerful collection tools at its disposal, including wage garnishment, bank levies, and property liens.
If you're held personally responsible for the unpaid taxes, the IRS can take action against your personal assets, even if the business is closed. This can include seizing personal bank accounts, garnishing wages, or placing a lien on your property.
In extreme cases, failure to pay employment taxes can result in criminal charges. The IRS takes employment tax violations very seriously, and if they believe that you willfully failed to pay these taxes, you could face criminal penalties, including fines and imprisonment.
Can the IRS Make You Pay?
The short answer is yes—the IRS can make you pay unpaid employment taxes, even for a closed business. If you were responsible for handling the business’s finances and failed to remit employment taxes, the IRS can impose the Trust Fund Recovery Penalty and hold you personally liable. Iowa tax law aligns with federal tax law in this regard, so it’s essential to address any unpaid employment tax issues promptly.
Closing a business doesn’t absolve you of the responsibility for unpaid taxes, and the IRS has up to 10 years to collect the debt. However, by taking proactive steps, such as consulting a tax professional, filing any missing returns, and exploring payment options, you can work toward resolving the debt and avoiding further financial consequences.
As an Iowa business owner, you know that running a business comes with its share of challenges, and tax law can often feel like an overwhelming aspect of that responsibility. But with the right approach and the help of professionals, you can work through the nuances of unpaid employment taxes and avoid personal liability for your business’s tax obligations.
Speak With a Tax Law Attorney Today
If you’re having to deal with a situation where you aren’t sure how to work with the IRS and you would like to speak to an experienced tax lawyer, call The Law Office of James R. Monroe today.
Our attorney proudly serves Des Moines, Iowa including clients in the Sherman Hill, Carpenter, Waterbury, Union Park, Laurel Hill, Indianola Hills, Jordan Park, Greater South Side, and beyond.