Business Entities and Related IRS Tax Collection Issues
There are a number of different ways a business can be organized. The method of organization can affect the way the IRS will collect taxes if the business falls behind in its business tax obligations. Some of the most common business entities are: sole proprietorships, general partnerships and corporations.
A sole proprietorship is a single individual operating a business in his or her own name or under a fictitious business name (also referred to as a “d.b.a”). In this situation, all of the business contracts, assets and liabilities are held in the owner’s individual name. If this business were to accumulate any federal tax liabilities, such as federal payroll taxes, the individual owner would be 100% liable for the taxes. The IRS would use its collection authority to collect the taxes from the owner, just as if he had accumulated the taxes based on his or her personal income tax return.
A general partnership is often formed when more the one person enters into business together. Forming a partnership does not require filing any formal documentation with the government. A partnership is the default entity that is created when two or more people go into business together, and fail to file the paperwork to create a more formal business entity. In a partnership, all partners are responsible for all liabilities of the partnership. This type of liability is referred to as “joint and several liability.” In other words each partner is personally responsible for paying 100% of the liabilities owed by the partnership. This basic law of partnership applies to federal taxes as well.
Federal tax problems will most often arise when the partnership falls behind in its federal payroll tax obligations. In this situation, the IRS has the authority to collect the tax from all of the partners. The IRS does not have the ability to collect more then the total amount of the tax, penalties and interest. It can collect the entire liability from one partner, all partners equally or from the individual partners as it sees fit. If one partner ends up paying more then his legal or equitable share of the tax, he may be able to take action against his partners based on the laws of his home state. However, those laws do not affect the ability of the IRS to collect the tax from any partner as it sees fit.
A corporation is a complicated, formal business entity. Corporations are formed under the laws of their home state. Although the laws regarding corporations vary from state to state, all states require the filing of specific, formal legal documents to form a corporation. Corporations are owned by their stockholders. Corporations can have one or many thousands of stockholders. In the eyes of the law, a corporation is a legal person. Corporations are able to own property, enter into contracts and accumulate debts. Because of their special legal status, any federal income tax liabilities accumulated by the business are owed by the corporation. The owners, or stockholders, are not personally liable for the taxes and in many cases, the IRS must collect the taxes from the corporation and not the stockholders.
However, the corporation does not provide individual stockholders with 100% protection from IRS collection activity. The most prominent example of this relates to federal payroll taxes. The IRS has the ability to assess a Trust Fund Recovery Penalty against any person who was responsible for making the federal payroll deposits, but chose not to do so. In many cases, the IRS uses this Trust Fund Recovery Penalty to transfer the liability from the corporation to individual stockholders. The IRS can then use its full collection authority to collect the taxes. This scenario usually occurs in the case of smaller corporation with a few stockholders who are also the officers and managers of the corporation.
Consideration of the type of business entity is just one of the many factors that affect an IRS collection matter. You may want to consider consulting a tax professional to guide you through any collection matters or negotiations with the Internal Revenue Service.
IRS Back Taxes
How to Resolve IRS Back Taxes
Trust Fund Recovery Penalty
Business Tax Compliance