What Happens If a Corporation Dissolves & Still Owes Tax Debt?
When a corporation goes through dissolution, it terminates its existence as an active, registered business entity. It still has some obligations to the Internal Revenue Service, including the filing of a final tax return, the payment of payroll and unemployment taxes, and the transfer to the IRS of any money withheld from employees for income taxes. If the business has back taxes that it is unable to pay out of assets, it must negotiate repayment with the IRS or with the agencies responsible for collecting state income taxes.
When a corporation is dissolved, it must pay debts and distribute assets to its shareholders or to outside parties who have a claim on those assets. The IRS requires corporations going out of business to file Form 966, Corporate Dissolution or Liquidation. The business must also file a final annual tax return, and make final employment tax, payroll tax, and income tax payments. The IRS also wants a report on capital gains and losses, the disposition of all business assets, and property exchanges with another entity, plus information on any change in the form of the business.
The IRS does not waive its right to unpaid income or payroll taxes when a corporate dissolution occurs. The agency can enforce these debts with liens and levies on the remaining assets of the corporation, or sue the corporate officers personally in order to collect. The IRS suspends collection efforts if the affairs of a business wind up in court, either through bankruptcy or other litigation, and puts collection on hold for six months after the litigation ends.
The officers of a dissolved corporation can file IRS Form 6565, Offer in Compromise, in an attempt to settle outstanding tax debts. This option is available only to businesses that are not under bankruptcy protection. The form lists all company debts and the amount the business is offering to pay for back taxes. Officers of a dissolved corporation can also negotiate installment agreements by filing Form 433B, Collection Information Statement. This form requires information on corporate officers and directors, as well as a thorough inventory of assets, liabilities, income and expenses of the business.
Each state has specific laws regarding the dissolution of corporations. This includes filing papers with the secretary of state or the agency that handles corporate filings. In addition, many states require certification that a dissolving corporation is current on required taxes, such as income tax, sales tax, and unemployment tax. New Jersey, for example, requires that the corporation going out of business apply for a Tax Clearance Certificate from the Division of Taxation. In Arizona, the comparable document is a Certificate of Clearance for Dissolution or Withdrawal, issued by the Arizona Department of Revenue. If back taxes remain due, then the states may use the same enforcement actions as the IRS, including levies, liens and lawsuits against the officers and directors.