I’m dealing with something I’ve not seen in a long time – a potential “Successor of Interest” case. This is where a company that owes taxes is ‘closed’ and a new one opened in the same field, using the same equipment (or assets) and by the same people or related parties. A potential client who was recently referred to me tried to do this.
What can happen in this instance is the IRS (or another taxing agency if it’s not Federal Tax) can file a Successor of Interest lawsuit stating the first company was closed simply to avoid paying taxes and go after the new company (“Successor Company”). The IRS’ success rate in these cases is about 90% as it is fairly easy to follow the trail of assets (especially when there is no bill of sale of said assets from the original company to the Successor Company). I’ve heard of a case like this where the IRS simply went to the Successor Company and seized the assets (essentially putting them out of business) to pay for the old tax debt.
You may ask, “What if the assets are sold for $1?”. Then the IRS (and/or the Tax Court) would determine if that is considered an arms-length transaction (fair-market value). If it is determined the sale price is below the market value then the sale could be invalidated or the ‘deemed amount’ increased to what the IRS/Tax Court decides. A sale not at fair-market value would not stop the lawsuit.
As you can imagine, the costs of this type of lawsuit can be staggering, both in terms of money and time. Plus the IRS can (and probably would) put liens or levies on assets, including bank accounts making the situation that much harder.
The best way to resolve a case like this (aside from not closing the first company & setting up the Successor Company!) is to set up a payment plan for the old debt, pay that down over time and keep current with the tax debt on the Successor Company. Since the original company is ‘closed’, then you can’t offer to pay a lessor amount under these circumstances so the full amount of taxes owed would need to be paid, plus interest & penalties as those accrue. If the original company is still in operation, then you can possibly negotiate your debt down through an Offer in Compromise – another reason not to close the original company!
You simply can’t close a company & assume the tax debt is forgiven – the IRS and other taxing agencies have ways to get to funds/assets that should have been used to pay the debt. Highly recommend anyone thinking of trying this potential tactic talk to their accountant and/or attorney before going this route.
Do you have questions on this (or another tax relief issue)? Please contact me through the form below.
Thomas C. Hodge, CPA
The Hodge Group
3040 N. Menard Avenue
Chicago, IL 60634