If you don’t pay your taxes, the IRS has the right to seize all of your business assets, effectively shutting down your business. Generally, however, because business licenses come from the state, the IRS cannot rescind your ability to operate a business.
However, if the agency seizes your bank accounts, inventory, equipment, business property, and even your leaseholds, you will not be able to operate even if your state and local business licenses are still intact. The good news is that the federal agency only utilizes this type of enforcement action as a last resort.
That said, it’s critical that you take proactive steps to protect your business and remain compliant with tax laws. Otherwise, you could run the risk of incurring significant fines or facing the seizure of your business’s assets. Learn more about how to protect your business from an IRS closure action below.
When Can the IRS Shut Down a Business?
Generally, the IRS cannot shut down a business for unpaid taxes. In contrast, most states can revoke business licenses for unpaid taxes and assess criminal charges if the business continues to operate. However, the IRS can prevent a business from operating by seizing all of its assets.
The IRS will attempt several other collection efforts before seizing business assets. In general, they’ll only take this option when it’s clear that you are unwilling to work with the agency in good faith. Here are some situations where the agency may start to seize your business assets:
Severe Tax Noncompliance
Severe tax noncompliance is the number one reason the IRS will consider seizing business assets and effectively forcing you to close down your business.
Severe tax noncompliance generally means failing to file taxes and failing to pay them repeatedly. This level of noncompliance typically amounts to gross negligence and isn’t a mistake or honest error. The business owner must have reasonably known about their tax burden and debt since the IRS has likely attempted to contact them multiple times.
Payroll Tax Problems
The IRS weighs payroll tax debt much more heavily than typical tax debt. This is because an employer withholds most payroll taxes from an employee. When an employer doesn’t submit payroll taxes, the IRS considers nonpayment theft.
Not paying payroll taxes puts your business at risk. First, the IRS will charge penalties and fees for your non-payment. Then, they might move on to other collection efforts, such as assessing the Trust Fund Recovery Penalty and, if necessary, initiating a tax levy to seize your assets.
Trust Fund Recovery Penalty (TFRP)
A trust fund recovery penalty is 100% of the value of unpaid trust fund taxes, which includes the taxes withheld from the employee’s paycheck but not the employer’s matching portion of the Social Security and Medicare taxes. The IRS may assess this penalty on various individuals who are deemed responsible for the unpaid taxes.
Deliberate Tax Evasion or Fraud
Another thing that could put your business at risk is deliberate tax evasion or fraud. Tax evasion is defined as intentionally and willfully avoiding paying the taxes you rightfully owe. Tax fraud happens when you or your business attempts to defraud the IRS from receiving their rightful taxes by lying or submitting false documents with your tax return.
Tax evasion is a type of tax fraud that is always criminal in nature. However, tax fraud is a broader category that can also include civil actions that lead to penalties, not criminal charges.
Substantial Outstanding Tax Debts
Another tax situation that threatens your company is owing a substantial outstanding tax debt. When the tax burden you owe is significant, the IRS may not wait around for you to reach the level of severe noncompliance. Considering the amount you owe, the IRS is more likely to push harder for you to pay what you owe.
What Does it Mean for the IRS to “Shut Down” a Business?
When people refer to the IRS shutting down your business, it means that the IRS is seizing your business assets. If the IRS also decides to seize your business property or leasehold, they can change the locks to do so.
This is different from when a state shuts down your business. Most states have the right to take away sales tax licenses and rescind professional licenses for unpaid state business taxes—in other words, the state can make it illegal for you to operate. Whether you lease or own the property, most states can also padlock the doors to prevent you from operating.
Although the difference is subtle, the IRS really only changes the locks when they are seizing your property or leasehold. Put another way, the IRS can make it impossible for you to operate your business, but generally, the state is the entity that can prevent you from operating by taking away your business license.
Business Asset Seizure
In order to resolve your tax debt balance, the IRS has the authority to seize and sell your business assets. The profit they earn from selling your assets will go towards resolving your tax balance. The IRS may sell everything you have, including computer equipment, fixtures, inventory, equipment, and leaseholds.
The agency can then sell all of the assets. Sometimes, the agency even sells a seized business as a turn-key opportunity to a new investor. The purchaser may be able to open the doors and start operating (potentially even with the same staff) immediately after buying the assets at auction.
Changing the Locks
One of the scariest things to imagine is walking into your business’ location only to find the doors locked and the locks changed. The IRS might take this action if it decides to seize the property or the building itself.
The IRS cannot replace the locks or put warning tags on the premises if they are not seizing real estate or a leasehold interest. If the IRS seizes a leasehold interest, the lessor will still be allowed to enter, and the IRS may have to pay rent to the lessor once any prepaid rent expires.
Note that in some cases, the IRS may prefer to store large assets on-site at the business until they can be auctioned off. In this situation, the IRS may change the locks if they enter into an agreement with the rightful occupant of the property.
Why It’s Rare for IRS Actions to Shut Down a Business
The great news is that it’s rare for the IRS to take actions that lead to a business shutdown. Doing so is costly and time-consuming. Plus, the IRS may not even be able to fully resolve your tax balance even after taking these steps. Below, we’ll go over a few reasons why the IRS will look towards other options before seeking to close your business.
High Cost of Business Seizures
The IRS knows that going after your business is very time-consuming, difficult, and costly. They’ll need to spend time and money analyzing what you owe, determining how much your business is worth, and then taking the necessary steps to seize, store, and auction off assets. That said, they will take this step if they know it will be worth it.
Preference for Negotiated Resolutions
The IRS prefers to work with taxpayers. In fact, if the IRS threatens to seize your business assets, you may be able to stop the seizure by appealing and explaining that you need the asset to raise the money to pay your tax bill.
This works in everyone’s favor since the IRS receives some of what it owes, and business owners can keep their doors open.
Economic Hardship Considerations
Business owners may have run into financially distressing situations in some situations. In this case, closing the business would not help the IRS resolve your debt. Therefore, consider filing for an economic hardship to save your company.
What You Can Do to Avoid IRS Action
The best news about IRS business closures is that they are completely preventable. You can avoid this type of consequence by staying informed about your tax obligations, addressing any issues that come up with payroll taxes immediately, and communicating with the IRS when you fall short on your obligations. In general, the IRS won’t close down your business if you communicate with them and work towards tax compliance.
Stay Current on Tax Obligations
The first step to remaining in good standing with the IRS is to be aware of your tax obligations. If you aren’t sure what your tax duties are, then it’s imperative that you reach out to a tax specialist ASAP. Not understanding tax laws is not a valid defense for not paying what you owe.
Once you understand your tax obligations, do your best to fulfill them in full and on time.
Address Payroll Tax Issues Promptly
If you do run across any payroll tax issues, then don’t make the mistake of waiting until later to resolve them. Tax issues that aren’t promptly taken care of can balloon into much bigger issues.
Communicate with the IRS
Next, always communicate with the IRS about your taxes, especially if you’ve fallen behind. Typically, the IRS will not pursue serious collection efforts, like closing down your business, if you’ve been in touch with them about your company, tax debt, and your intentions to pay them back. You should strongly consider engaging a tax attorney or tax professional to handle these communications with the IRS.
Consider Payment Plans
If you’ve fallen behind on your taxes, then don’t fret. The IRS has plenty of options, including reasonable payment plans, to help you pay off what you owe over time. Most payment plans allow your business to make monthly installment payments on the overall balance until you’ve paid everything off.
Explore Other Resolutions
Do you already owe a significant tax debt that you know you won’t be able to pay off? If so, then there may be other options for you. One option is applying for CNC, or currently non collectible, status. This status lets the IRS know that you don’t have the resources to pay anything towards your taxes. If you have a business, then you’ll need to prove to the IRS that your business is losing money or not making enough to help you pay back your taxes.
An OIC arrangement, or offer in compromise, allows you to create a payment plan with the IRS that keeps you in good standing but doesn’t require you to pay off your tax debt balance in full.
Steps to Take if the IRS is Threatening Your Business
Is the IRS currently threatening to take action against your business? There are ways to stop collection actions from the IRS when you take the proper steps.
Request a Collection Due Process (CDP) Hearing
A CDP hearing allows you and the IRS to lay out the tax situation fully, review all the options available, and make any disputes about the amount you owe if necessary.
File All Missing Returns
Unfiled taxes can be a huge cause for concern. Filing all your missing returns can help you and the IRS better understand your overall tax picture. This will give both parties more information to help resolve your tax issues.
Work with a Tax Professional
One of the best things you can do if the IRS threatens to take enforcement action against you is to hire tax representation. Working with a tax professional is a massive advantage because you can lean on the expert’s knowledge regarding tax laws and IRS tax relief options.
Can the IRS Shut Down Your Business?
As a business owner, it’s your duty and obligation to consider questions like, can the IRS shut down your business? Now that you know more about the IRS’ authority and options, it’s best to do your due diligence and comply with the tax codes before facing penalties.
It’s normal to feel anxiety and fear over negotiating with the IRS but remember that the tax agency only has one goal – collecting what you owe. If you’re working with them in good faith to pay off your balance, then it’s highly unlikely that they’ll attempt to close down your business. This type of enforcement action is very rare and totally preventable. After all, a profitable business could mean more money in the agency’s collection accounts when you’re paying what you owe.
If you’re still unsure about your tax obligations or how to resolve a past-due tax problem, then our team here at Wiggam Law can help. Our tax resolution attorneys have helped our clients save a collective $2.7 million since the firm opened.
Schedule a 30-minute consultation call with Wiggam Law or call us at (404) 233-9800 now to discuss your situation in more detail with our best tax resolution specialists.