When a Michigan business becomes unprofitable or starts to fail, shutting down is often the only realistic option. But when a business has outstanding tax debt, this leaves business owners wondering what their options are. While many business owners assume that a shut-down business is no longer liable for old tax debt, that isn’t necessarily the case–at either the federal or state level.
Unpaid tax debt can survive even after a business shuts down, and in many cases, owners or other responsible parties risk personal liability. Closing a business incorrectly or failing to address tax debt ahead of time can lead to serious financial issues, which is why you should consult a tax attorney as you prepare to close down for good.
Call The W Tax Group at 877-500-4930 to discuss your next steps.
Key takeaways
- Closing a business does not eliminate state or federal tax debt.
- You must file final returns even if you can’t immediately pay the balance.
- Certain types of tax debt can trigger personal liability.
- Both the IRS and Michigan Treasury may pursue responsible parties.
- Payment options can help you tackle your tax debt in a way that fits your budget.
Step One: File Final Returns (Even If You Can’t Pay)
One of the biggest traps taxpayers fall into is not filing tax returns until they can pay the tax bill in full. However, failing to file often yields higher penalties and more severe consequences than failing to pay.
Depending on your business structure, you may have to file a variety of forms to file taxes one more time and shut down operations, including:
- Form 941
- Form 940
- Form 1120
- Form 1120-S
- Form 1065
- Schedule C
If your business also did payroll, don’t forget to issue final W-2s and remit final withholding. All returns should be marked as “final return.” This box is found near the top of the front page on the return.
At the state level, you’ll need to file all required returns with the Michigan Department of Treasury. Forms required for the Treasury include Form 5080 (to report sales and use tax), Form 4891 (for corporate income tax), and final withholding reporting. Additionally, you’ll need to file Form 163 to notify the government that you are closing your business. Once you have paid all required taxes, you can request a Tax Clearance Certificate.
Why is it so important to file final returns even if you can’t pay? This protects you from failure-to-file penalties, which are significantly higher than failure-to-pay penalties. It also marks a clear end for the business and notifies the government entities involved that they shouldn’t expect further tax returns. Finally, it shows a good faith effort to comply, even if immediate payment isn’t possible.
What Happens to Your Unpaid Business Tax Debt?
You’ve filed your tax returns but haven’t paid the balance due shown on those returns. Here’s what to expect from both the IRS and the Michigan Treasury.
IRS Perspective
Unpaid payroll taxes are considered trust fund taxes. This is money withheld from employees’ paychecks for Social Security, Medicare, and income tax. Since businesses are only meant to hang onto it and then pass it along to the IRS, the IRS pursues it fairly aggressively. They will continue to pursue this debt even after a business closes.
If the IRS cannot recover payment from the business itself, it may identify one or more responsible parties who should have ensured that trust fund taxes were remitted. It can then assess the Trust Fund Recovery Penalty, equal to the amount of unpaid trust fund taxes, against those individuals.
When it comes to a business’s income tax debt, liability depends on the business’s structure. The IRS may seek income tax payment from a corporation for as long as the corporation is intact or as long as it still has assets. Even if it has no assets, the IRS may seek payment if assets were improperly transferred.
Other business types–S-corps, sole proprietorships, and partnerships–already pass income tax obligations to the business owners. Unpaid income tax is automatically a personal liability in these situations.
Michigan Department of Treasury Perspective
The Michigan Department of Treasury is just as serious about trust fund taxes as the IRS. However, in addition to taxes withheld from employees’ paychecks, they also collect sales and use tax.
A business that fails to pay sales and use tax or withholding tax is subject to aggressive collection efforts. Under Michigan law, the Department of Treasury can assign personal liability to business owners, corporate officers, or any other parties who were responsible for remitting those taxes.
Should the business not pay trust fund taxes, the Treasury can use tax warrants and levies to recover what’s owed.
What Is a Responsible Person Assessment?
When a business does not pay trust fund taxes, the government doesn’t stop attempting to collect. Instead, both the IRS and the Michigan Department of Treasury will determine who was responsible for ensuring that taxes were paid. They will then hold that individual (or multiple individuals) personally liable for the unpaid amount.
The IRS assesses the Trust Fund Recovery Penalty, equal to the amount of unpaid tax debt, while the Michigan Department of Treasury holds the individuals directly responsible for the trust fund tax debt. A responsible party may be an owner, executive, officer, shareholder, accountant, or other party with the authority to sign checks, the responsibility to make financial decisions, and access to company funds.
The IRS uses Form 4180 to determine who may be a responsible person. This interview asks questions about your job duties and responsibilities. The MI Department of Treasury will send out an Intent to Assess alerting you of their plan to hold you liable for the tax debt.
Can Bankruptcy Wipe Out Business Tax Debt?
Bankruptcy is sometimes lauded as a solution to tax debt, but the matter is far more complex than it appears. Bankruptcy can help in some situations, but when it comes to taxes you’re personally liable for, bankruptcy may not make a difference.
If the Business Files for Bankruptcy
When a business files for bankruptcy, its income tax debt may be written off. However, trust fund taxes are not wiped out. These taxes are different because they never belonged to the business in the first place. Even if a business declares bankruptcy, the government still requires payment of trust fund taxes.
If You Personally File Bankruptcy
Individual bankruptcy could still leave you with substantial tax debt. The Trust Fund Recovery Penalty generally survives bankruptcy, and generally, you can only discharge tax debt that is at least three years old. So while bankruptcy may leave you with more free funds to pay off your tax debt, it is unlikely to wipe out tax debt resulting from your business shutting down.
Options to Resolve Debt During or After Business Closure
There are several options available to you if you still have lingering tax debt after your business closes. A payment plan is a viable option for many people, available for both state and federal tax debt. It protects you from enforced collection actions and can limit new penalties.
Penalty relief is another option to consider. While it does not completely get rid of tax debt, it can wipe out penalties that make up 25% to 50% of your final tax bill.
In some cases, an offer in compromise may be a good choice. An offer in compromise is rarely granted for cases involving personal liability for trust fund taxes, though, so you may want to discuss your options with a tax attorney first.
This is also a good time to work with an Enrolled Agent or tax attorney to address your business tax debt. An experienced tax professional can negotiate with the IRS and the Department of Treasury on your behalf, help you find the right payment solution for your needs, and take over communication on your behalf.
Closing your business doesn’t mean that your tax obligations go away. Planning for this ahead of time may change how you handle your business’s remaining assets and tax bills. While closing a business can be stressful and financially painful, it does not have to leave you with serious tax problems for years to come. A Michigan tax attorney can help you compare your options and take action before aggressive collection efforts begin.
Call The W Tax Group at 877-500-4930 or contact us online to discuss your needs.
Frequently Asked Questions
Can the Michigan Treasury come after me personally for unpaid business taxes?
Yes, for certain types of business taxes. The Treasury may hold responsible persons personally liable for unpaid trust fund taxes.
What happens if I never file final sales or withholding returns?
Penalties will continue to accrue. The government may eventually file estimated returns on your behalf, assess the estimated amount due, and begin to pursue payment. Filing is non-negotiable, even if you cannot afford to pay in full.
Can I reopen my business if I still owe state or IRS taxes?
You may, but you should expect tax authorities to pursue unpaid tax debt. Reopening doesn’t give you a fresh start when it comes to tax obligations.
How long can the IRS or Michigan Treasury collect on old business tax debt?
Generally, the Michigan Department of Treasury has six years from the date of the final tax assessment to collect what it’s owed. The IRS generally has ten years from the date of assessment.
What should I do if I receive a personal assessment notice from the Michigan Treasury?
You should talk to a tax professional immediately. You still have a chance to appeal their decision, but waiting too long may result in them seizing your assets and income to pay the tax debt.
Resources:
https://www.irs.gov/businesses/small-businesses-self-employed/closing-a-business
https://www.irs.gov/pub/irs-pdf/p542.pdf
https://www.michigan.gov/taxes/-/media/Project/Websites/taxes/Forms/SUW/TY2025/5080.pdf?rev=4ac3b5f48ff14a3db051206161788054&hash=A9C5AD9075D0855CCE5922551EC5B9CF
https://www.michigan.gov/lara/bureau-list/cscl/corps/limited-liability-co/filling-requirements-continued/dissolution
https://www.michigan.gov/taxes/business-taxes/clearance/accordion/tax-related/selling-or-closing-your-business
https://www.irs.gov/newsroom/what-business-owners-need-to-do-when-closing-their-doors-for-good
https://www.irs.gov/faqs/small-business-self-employed-other-business/starting-or-ending-a-business
https://www.michigan.gov/taxes/questions/collections/corp/why-am-i-being-held-responsible-for-a-corporations-debt
https://www.michigan.gov/taxes/coll-audit/hearings/intent-to-assess-bill-for-taxes-due
https://www.michigan.gov/taxes/collections/collection-process-for-delinquent-taxes
