Tax liabilities for S-corp

[MrEncore]

I have a S-corp limo service in VA that shut down end of 2022. I had not filed 2020-2021 taxes until this year and got tax penalties notices from IRS and State there after. The IRS forgave 2020 penalties but I still have 2021 tax penalties from IRS and 2020-2021 penalties from VA that have gone to private collections.

I have recently received notice that there is a possibility that money can be removed from my bank account or assets taken.

My question is are they able to go after my personal assets or banks (I was the 100% shareholder for the business). There were no real assets of the business when I shut it down. It was my understanding S-corp protection is they can't go after you for debts. Does this count for tax liabilities as well.

Additional 1 company car is also unpaid for property tax. It was titled under the company but since was sold due to accident. Can the county go after my personal bank/assets.

Thanks for any tips.

 

[adjusterjack]

I have recently received notice

From where?

My question is are they able to go after my personal assets or banks

Who is "they"?

It was my understanding

Means "I read it or heard it from some unqualified source and never bothered to confirm it with proper sources."

Does this count for tax liabilities as well.

Additional 1 company car is also unpaid for property tax. It was titled under the company but since was sold due to accident. Can the county go after my personal bank/assets.

Yes.

Google "pierce the corporate veil."

 

[LdiJ]

I have a S-corp limo service in VA that shut down end of 2022. I had not filed 2020-2021 taxes until this year and got tax penalties notices from IRS and State there after. The IRS forgave 2020 penalties but I still have 2021 tax penalties from IRS and 2020-2021 penalties from VA that have gone to private collections.

I have recently received notice that there is a possibility that money can be removed from my bank account or assets taken.

My question is are they able to go after my personal assets or banks (I was the 100% shareholder for the business). There were no real assets of the business when I shut it down. It was my understanding S-corp protection is they can't go after you for debts. Does this count for tax liabilities as well.

Additional 1 company car is also unpaid for property tax. It was titled under the company but since was sold due to accident. Can the county go after my personal bank/assets.

Thanks for any tips.

Yes, the IRS can go after you personally for the penalty (and tax) debt of the corporation. You had control over the S-Corp and therefore controlled whether or not the taxes were filed and paid on time. That makes it possible for the IRS (and the state) to go after you personally for those penalties and tax debt.

I cannot answer about the property taxes for the car. That is a local issue and you need local advice.

 

[Taxing Matters]

My question is are they able to go after my personal assets or banks (I was the 100% shareholder for the business). There were no real assets of the business when I shut it down. It was my understanding S-corp protection is they can't go after you for debts. Does this count for tax liabilities as well.

The IRS may not collect late filing 1120-S penalties from S-corporation shareholders except to the extent that the S-corporation transferred assets to its shareholders before shutting down. Federal tax law respects the separate existence of a corporation from its shareholders. However, if the S-corporation owed any trust fund taxes (essentially taxes of others that are collected by the business and then forwarded to the government) that's another matter. Those funds are not taxes owed directly to the government but other people's tax money that the company (and those who take care of the taxes for the company) are liable for if not turned over to the government. For federal tax, the major trust fund liability are the income and FICA taxes withheld (or that should have been withheld) from salaries or wages paid but not forwarded to the government.

I am not familiar with VA's rules on collection of penalties. It might well be the same as what applies to the IRS. Note that in many states state sales taxes may be personal liabilities of the owners/officers of the company. States in general take collection of sales tax seriously and tend to aggressively go after them. So if there may be any sales taxes owed, you really need to see a VA tax professional about that.

 

[davew9128]

Yes, the IRS can go after you personally for the penalty (and tax) debt of the corporation. You had control over the S-Corp and therefore controlled whether or not the taxes were filed and paid on time. That makes it possible for the IRS (and the state) to go after you personally for those penalties and tax debt.

If OP didn't receive any property in the dissolution of the corporation, there is zero possibility of transferor liability with regards to the late file penalties.

 

[LdiJ]

If OP didn't receive any property in the dissolution of the corporation, there is zero possibility of transferor liability with regards to the late file penalties.

I wasn't suggesting that the OP was responsible as a shareholder. I was suggesting that the IRS could hold the OP responsible as the party responsible for filing the tax returns and making the payments. It does however appear that there was a car that was sold. When that happened and where that money went could impact things.

Since the collection agency for the IRS is threatening to levy his bank accounts it would probably be in his best interest to consult a tax attorney at this point.

 

[Taxing Matters]

I was suggesting that the IRS could hold the OP responsible as the party responsible for filing the tax returns and making the payments.

If it was a trust fund liability then, as I indicted before, the IRS may use the trust fund recover penalty of IRC § 6672 to make those responsible owners/employees of the corporation personally liable. Penalties for late filing of a corporation's tax returns is not a trust fund liability. That cuts off the IRS being able to go after any personal assets of the employees/shareholders of the corporation for those 1120-S late filing penalties unless they did something more than just not file the returns timely. The most common way to do that is if the IRS can show the shareholders were given distributions of corporate assets while the corporation was insolvent or that rendered the corporation insolvent. That's done as a transferree liability or fraudulent conveyance assessment (depending on the exact facts and the applicable state law) against the shareholders/employees who got those assets, and the amount assessed is no more than the value of the assets distributed to them.

The late filing penalty for the 1120-S tax return is one that the IRS has to collect from corporate assets, either from assets it still has or assets that it transferred to its owners. Very early in my career as revenue officer for the IRS I was assigned a number of cases of S-corporation penalty assessments (as training material, mostly). I ended up closing out probably 95%+ of those as not collectible because the corporations had long since ceased to operate, the assets were long gone, and I could not look to the officers or employees of the corporation to pay it. In short, the IRS would never see a penny paid towards those late filing penalty assessments owed by the corporation. All that happened was that I ended up having to create a bunch of paperwork for the file to close it. And then that ended up in a big government storage facility where it would never be seen again. (Think of the last scene of the Raiders of the Lost Ark in which the Ark is crated and put into a huge warehouse of unused government property, only instead of an ark, it's a box of retired case files as an apt illustration of just how likely the case file would see the light of day again).

 

[LdiJ]

If it was a trust fund liability then, as I indicted before, the IRS may use the trust fund recover penalty of IRC § 6672 to make those responsible owners/employees of the corporation personally liable. Penalties for late filing of a corporation's tax returns is not a trust fund liability. That cuts off the IRS being able to go after any personal assets of the employees/shareholders of the corporation for those 1120-S late filing penalties unless they did something more than just not file the returns timely. The most common way to do that is if the IRS can show the shareholders were given distributions of corporate assets while the corporation was insolvent or that rendered the corporation insolvent. That's done as a transferree liability or fraudulent conveyance assessment (depending on the exact facts and the applicable state law) against the shareholders/employees who got those assets, and the amount assessed is no more than the value of the assets distributed to them.

The late filing penalty for the 1120-S tax return is one that the IRS has to collect from corporate assets, either from assets it still has or assets that it transferred to its owners. Very early in my career as revenue officer for the IRS I was assigned a number of cases of S-corporation penalty assessments (as training material, mostly). I ended up closing out probably 95%+ of those as not collectible because the corporations had long since ceased to operate, the assets were long gone, and I could not look to the officers or employees of the corporation to pay it. In short, the IRS would never see a penny paid towards those late filing penalty assessments owed by the corporation. All that happened was that I ended up having to create a bunch of paperwork for the file to close it. And then that ended up in a big government storage facility where it would never be seen again. (Think of the last scene of the Raiders of the Lost Ark in which the Ark is crated and put into a huge warehouse of unused government property, only instead of an ark, it's a box of retired case files as an apt illustration of just how likely the case file would see the light of day again).

I stand corrected. For some reason I thought that they could go after the responsible parties for more than just trust fund taxes. Although, the cases I am familiar with there were assets that got transferred to the shareholders so that might have been a factor. In this case, what happened to the company car could be a factor depending on how/when it was sold. The OP also said "no real assets" which is an indicator that there might have been something, even if relatively small.

 

[davew9128]

I stand corrected. For some reason I thought that they could go after the responsible parties for more than just trust fund taxes. Although, the cases I am familiar with there were assets that got transferred to the shareholders so that might have been a factor. In this case, what happened to the company car could be a factor depending on how/when it was sold. The OP also said "no real assets" which is an indicator that there might have been something, even if relatively small.

Even if IRS decided to pursue a shareholder under transferor liability, in court the burden of proof is on the IRS. I can't see IRS counsel wanting to spend any real resources litigating and pursuing an 1120S late filing penalty.

 

[Taxing Matters]

Even if IRS decided to pursue a shareholder under transferor liability, in court the burden of proof is on the IRS. I can't see IRS counsel wanting to spend any real resources litigating and pursuing an 1120S late filing penalty.

As I recall, that route for pursuing an 1120-S late filing penalty can't be done in Tax Court, so the actual litigation would be done by DOJ tax division in federal district court, or perhaps in bankruptcy court. In my experience in working with the DOJ attorneys they'd be even less enthused about doing that than IRS counsel would be. The IRS has to be faster in pursuing those penalties than it typically is to have realistic shot at it, and DOJ ranks these penalty only late filing penalties as pretty low in their work priority. DOJ might try it as a training exercise for a new attorney in its ranks, but the experienced litigators' time is much better spent on other things.

 

[davew9128]

As I recall, that route for pursuing an 1120-S late filing penalty can't be done in Tax Court

I would imagine the penalty in this situation would be assessed as part of a deficiency notice on the shareholder, where the shareholder would then be able to contest it in Tax Court. Any other method used to pursue it would mean there is something bigger going on.

 

[Taxing Matters]

I would imagine the penalty in this situation would be assessed as part of a deficiency notice on the shareholder, where the shareholder would then be able to contest it in Tax Court. Any other method used to pursue it would mean there is something bigger going on.

I was assuming it was the late filing penalty for not having filed 2020 and 2021 returns late and that the penalties were all that was involved. But it may well have come up as part of an audit of the individual I agree with you that might provide a route to challenge it in Tax Court. Of course, challenging a stand alone late filing penalty in any court isn't likely to be cost effective. But I've seen a few taxpayers who wanted to pursue small assessments as far as they could out of "principle". They'd probably also be the type willing to spend a lot money in divorce court arguing over the red chair they wanted, too.

 

[LdiJ]

I was assuming it was the late filing penalty for not having filed 2020 and 2021 returns late and that the penalties were all that was involved. But it may well have come up as part of an audit of the individual I agree with you that might provide a route to challenge it in Tax Court. Of course, challenging a stand alone late filing penalty in any court isn't likely to be cost effective. But I've seen a few taxpayers who wanted to pursue small assessments as far as they could out of "principle". They'd probably also be the type willing to spend a lot money in divorce court arguing over the red chair they wanted, too.

I have a client like that. He will go to great lengths to fight the IRS over as little as $10.00. AND if he can possibly find any reason why I should have done something differently to avoid it, then he expects me to do the work for free. There have been a handful of times in the past 20 years where I have just paid whatever it was the IRS wanted, out of my own pocket, because in the long run it was cheaper and easier for me than fighting with the IRS. On top of that, his financial advisor is "god" to him and he insists that I do whatever it is that his financial advisor recommends, even if I know it will utterly fail.

 

[Bali Hai Again]

I have a client like that. He will go to great lengths to fight the IRS over as little as $10.00. AND if he can possibly find any reason why I should have done something differently to avoid it, then he expects me to do the work for free. There have been a handful of times in the past 20 years where I have just paid whatever it was the IRS wanted, out of my own pocket, because in the long run it was cheaper and easier for me than fighting with the IRS. On top of that, his financial advisor is "god" to him and he insists that I do whatever it is that his financial advisor recommends, even if I know it will utterly fail.

Are you accepting new clients?

 

[davew9128]

On top of that, his financial advisor is "god" to him and he insists that I do whatever it is that his financial advisor recommends, even if I know it will utterly fail.

I call people like that former clients. I've also had non-clients approach me about representing them in Tax Court over relatively small amounts, small enough to be less than my retainer for taking the case, because they believe appearing in Tax Court to contest an assessment is akin to negotiating the fine for speeding in Traffic Court.