Business Restructuring and IRS Tax Debt: What an Atlanta Tax Lawyer Wants You to Know Before You Reorganize

When a business is reorganized, there are many things that could happen. It could have a new legal name, different ownership, different management, different tax classification, or a host of other changes. But, if you already have outstanding IRS tax debts, changing your business is not a simple matter. The reorganization will change who owes the debt, how your business files and pays taxes, and possibly how exposed your personal assets may become.

Before you execute any reorganization, document, or move your business’ assets, there are some important issues you must consider.

Debt Across Entities

Just because your business is no longer a sole proprietorship, partnership, or LLC, it doesn’t mean your business’ tax obligations are gone. The original business may still owe tax and penalties and interest. There may be a reorganization that involves your business continuing to operate in the same manner as it did before, just with a different legal name or type.

For example, the same business is located in the same physical space, uses the same equipment, has the same customers, etc., but now has a different legal name. There is nothing wrong with reorganizing. It is done for legitimate business reasons, but it is important that you ensure that the transaction is fair, proper, and documented. Otherwise, it may be viewed as improper.

Payroll Tax Exposure

Payroll taxes have a higher risk associated with them than other types of business taxes. Employers withhold employee wages, and those funds are not yours to spend; they belong to the employees and the government. If your business fails to remit those funds, the individuals responsible may be personally liable. Titles do not determine whether an individual is responsible. Rather, the individual’s actions, decisions, and roles will be assessed. It is not sufficient to just ask, “Who’s in charge?” but rather “Who paid the bills?” and “Who had control over the finances?” There are many questions that should be answered during the reorganization process.

Are all payroll tax returns filed?

Have payroll taxes been properly withheld?

Who has control over the accounts?

Who pays the bills?

Are new obligations being met? Are older payroll obligations being neglected?

If you do nothing about the past employment taxes – as you can see at https://www.investopedia.com/terms/p/payrolltax.asp, the new entity may still have to address the problem.

Asset Transfers

The business owner may wish to transfer various assets to the new entity during the reorganization, such as vehicles, inventory, accounts receivable, equipment, contracts, etc. That value matters. A sale of valuable property to a new company for very little, or nothing at all, could get the IRS' attention. The same goes for transfers to family members, insiders, or companies under common control.

Proper documentation can go a long way toward explaining what happened and why. This might mean obtaining a valuation report, putting together a purchase agreement, getting board resolutions authorizing the transfer, maintaining payment receipts, and writing up a narrative of the commercial rationale. An Atlanta tax lawyer can also help ensure the documentation supports the tax treatment of the transaction. An informal transfer can trigger issues even where there was no intent to evade taxes.

Make it a point to spend 30 minutes cataloguing every piece of property, liability, contract, and bank account that could be affected by the proposed restructuring. You might find issues before you find yourself arguing with the government about them.

Payment Options

Depending on the circumstances and ability to pay, a taxpayer with a tax liability may be able to work out a payment plan, enter into a compromise, or ask whether the debt is currently uncollectible.

Which option is the best choice will depend on current filing status, available assets, income, the nature of the ownership, and how the tax arose. A restructuring could still be in order, but it needs to happen in harmony with a tax strategy, not in isolation from it.

It's also crucial to avoid generating additional tax debt while trying to deal with old tax debt. A payment plan will fail if the taxpayer misses required filing deadlines or current period tax payments. If the restructured company isn't even current after the first pay period, what exactly did we fix?

Business and Personal Funds

An owner often pumps money into a failing business or draws from the business for personal expenses. Those actions could muddy the waters when it comes to discussions about liability, ownership, and collections.

During a restructuring, document all capital investments, loans, distributions, and repayment arrangements. Set up bank accounts in the name of the correct entity, use written contracts when necessary, and don't just transfer money back and forth between related companies.

It won't magically erase the tax liability, but it could make the situation easier to explain and justify.

One thing that can also get missed is if the IRS has filed a Notice of Federal Tax Lien (click this for more). If there is a federal tax lien against a business, it can attach to the property and rights to property of the business, including its receivables, and a transfer does not automatically extinguish that interest.

The buyer, lender, or landlord might find out about the lien filing as part of their own due diligence, potentially complicating a loan or a new lease for the entity.

Prior to any restructuring closing, identify any existing lien filings, the scope of assets affected, and how proceeds could be used or held pending resolution.

Your Atlanta tax attorney can time any lien withdrawal or release request around the restructuring transaction.

Think about the mechanics of closing the old company as well. You might still owe federal and state final income tax returns, W-2s or 1099s, payroll accounts, sales tax registrations, and quarterly Form 941s after you shut it down. The new EIN doesn’t relieve you of those obligations.

Filing Preparation

A restructuring should start with a full look at past-due returns, outstanding notices, payment history, assets, and future operations. Waiting until after a transfer takes place could cut off your options and leave you fighting over something avoidable.

Before transferring any more assets, get together the business' recent tax notices, filed returns, financial statements, payroll records, and proposed restructuring documents.

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