Unpaid payroll taxes after a business closes

When you close, file a final Form 941 for the last quarter with wages and check the box saying the business has closed, plus a final Form 940, Forms W-2 and W-3. The IRS's closing a business checklist lists every return. Missing final returns lead to CP259 notices and estimated assessments that overstate the debt.

• Sole proprietor: the owner is the business, so all payroll taxes, penalties and interest are personal debts. Out-of-business sole proprietors owing $50,000 or less may use a Simple Payment Plan.
• Corporation or multi-member LLC: the entity owes the full balance. The IRS can assess the trust fund portion against responsible people. The employer share, penalties and interest usually stay with the defunct entity.
• Single-member LLC: for employment taxes it's treated as a corporation-like entity, so owners face TFRP exposure rather than automatic personal liability for the whole balance.

Once a business stops operating, the IRS has fewer assets to collect from and the TFRP becomes the main route. Revenue officers often start the trust fund investigation promptly so the three-year assessment window doesn't run out. Expect Form 4180 interviews and then Letter 1153.

Selling business assets while payroll taxes are unpaid is risky. A filed federal tax lien attaches to business property, and proceeds paid to other creditors while taxes go unpaid are classic evidence of willfulness. If you're selling, plan for the tax balance at closing. Buyers may also face successor-liability claims under state law for state taxes.

For individuals assessed the TFRP: protest within 60 days, then installment agreements, an Offer in Compromise, or Currently Not Collectible status if you can't pay. Penalty relief may reduce the entity's balance but not the TFRP. Run the business assessment and select "closed" for matched options.