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Obviously, there will be “nothing” to do unless the business owes taxes or has not filed all its tax returns. These comments are prompted by the fact is that the IRS has just issued a Manual Administration Supplement No. 855 to instruct its employees about how to proceed in the case of insolvency proceedings.
If the company files bankruptcy, the IRS will file a Proof of Claim and, depending upon the nature of its claim—is a Federal Tax Lien filed?are the taxes assessed?—it will proceed to pursue its rights based on its priority relative to other creditors. If the proceeding is instead a receivership, assignment for the benefit of creditors, corporate disolution, or insolvent decedents estate, the IRS will likewise file a Proof of Claim, but note that each has a “fiduciary” that acquires the property of the debtor or decedent which then becomes the property of the insolvent estate, and the fiduciary has the responsibility of administering and distributing the property, including payments to creditors. If the company does not initiate a proceeding, the IRS will try to contact the owner.
In these situations, if other creditors are paid ahead of the Internal Revenue Service, there is a Federal Priority Statute, 31 U.S.C. § 3713, which provides that a fiduciary could become personally liable if it pays other claimants ahead of the IRS. In addition, the IRS may assert “transferee liability” against persons who receive property from insolvent estatesor companies if federal taxes are not paid.
If the business is a sole proprietorship, the IRS will doubtless pursue any assets of the owner. Likewise, if it is a partnership, the IRS will pursue the assets of the partnership, as well as consider potential exposure of the general and limited partners. If the business is a corporation, liability generally extends only to the extent of corporate assets, except for situations where transfers have been made voluntarily to the shareholders without adequate consideration.
In all these situations, there is the specter of further personal liability for those involved in the business. If the unpaid liabilities include employment taxes, the IRS can pursue “responsible officers” pursuant to I.R.C. § 6672. Under I.R.C. § 7501, above and beyond employment taxes, a person required to collect or withhold any Internal Revenue tax from any other person and pay it over to the Internal Revenue Service will similarly be treated as the holder of a “trust fund” in favor of the United States, which can be assessed and collected in the same manner as the underlying taxes themselves.
The important lesson is simply that the end of a business does not mean the end of liability to the IRS or the IRS’ interest in that business. It is important to consult with a knowledgeable tax advisor if it appears your business is going under to make sure you are aware of all possible ramifications, and your own exposure to personal liability in these situations.
George Connelly is recognized as one of the leading federal tax litigators in the United States. His practice focuses on IRS audit, collection and criminal matters including civil and criminal tax litigation matters, for clients ...