Tax Liability for deceased spouse

We recently filed several form 941-Employee With holding which were never filed by
my late father for a sole proprietorship in Texas. We requested the penalties not apply because we were not aware of the problem. IRS refused to do so in a letter addressed to my late father (with his tax ID) dated 11-30-00, over two years after his death. The business is now under my mother's name and the amount owed is a substantial. The IRS said the reasons stated in our letter do not
fall into the guidelines for abating the penalties.
We have been depositing the taxes on time for the past 6 months and are current with all 941 froms. What are the guidelines for avoiding the penalties? Is my mother liable for the tax? Can we lose the business? Any advice would be greatly appreciated.

I am not and attorney and not a CPA.

The IRS sucks, huh? Simple answer is that your mother/the business is still liable for the 941 taxes no matter which way you look at it. Unfortunately, the money from a 941 filing is not your father's money, it is his employee's Federal tax and Social Security money. Probably the one thing that your father did that he thought gave him the most leverage actually gave his surviving family the most debt:staying a sole proprietor. Since your mother is surviving him and I assume that they were married at his time of death, the IRS sees the legal entity of the business (kindof) as surviving. If your father's company had existed as a corporation then you could have dissolved the corporation.

There might be some clever ways (careful) of maintaining the business without having problems with the IRS. I would contact a lawyer that deals in probate and tax laws and a CPA. Most importantly, keep filing those current 941s and 940s and W2s. The IRS is much more willing to deal with you when you are paying your current taxes. Usually you can work out a payment plan that meets your income requirements. Tell your mother to carefully review all of the PERSONAL 1040s during the time period in question. There is a chance that the IRS seized some of their personal refunds to cover the expense.

One thing to look at for the period in question is who were the employees. Some states allow spouses and unmarried children of sole-proprietors to be exempt from certain taxes (usually unemployment taxes). Be careful, since the IRS is already hot on you trail, they will be very unforgiving of mistakes. But don't be afraid of them, they are usually very willing to work with you.