Thinking of Selling Your Business? This Obscure IRS Form Keeps You Safe if the Buyer Doesn’t Pay Their Payroll Taxes
Did you know that if you don’t file an obscure form after you sell your business, the IRS could come after you if the new owner doesn’t pay their payroll taxes?
Since 2014, the IRS has required Form 8822-B, Change of Address or Responsible Person – Business to be filed within 60 days of a change of address or a change in responsible person. The “responsible person” for a business is the one who “controls, manages or directs the applicant entity and the disposition of its funds and assets.” This person is specified when a new business applies for an EIN, and is the one the IRS will pursue if payroll taxes aren’t paid.
When a business pays its employees, a portion of employee pay is withheld to pay the employees’ share of payroll taxes. which include Federal income tax, Medicare and Social Security taxes. This portion is considered to be held in trust by the employer until the taxes are paid to the IRS. If those taxes aren’t paid to the IRS — which happens sometimes with cash-distressed companies — the IRS imposes a Trust Fund Recovery Penalty (TFRP) against the company. A TFRP consists of the withheld taxes plus interest. And those can add up pretty quickly, if you’re not careful.
The IRS is allowed to seek out “any person required to collect, truthfully account for, and pay over any tax” withheld and owed to the taxing agency.” The words “any person” means the IRS can look to anyone they consider to be a responsible person. Besides the responsible person named on the EIN application, the IRS has pursued CFOs, controllers, bookkeepers and owners by demonstrating that this person knowingly paid other vendors or their employees before paying payroll taxes. The IRS is known to be aggressive in pursuing anyone they can find. Criminal charges and jail time are possible.
If you sell your business, but neglect to update the IRS on the new responsible person by filing Form 8822-B, you could be the one the IRS chases down for payment. There’s no penalty for not filing this form, but you run the risk of being held liable for your successor’s unpaid payroll taxes. And if your mailing address also changes, you might not receive notification that something is amiss until it’s too late to do anything about it.
Thinking of selling your business or shutting it down? Call our office to make sure you don’t miss any steps that could come back and haunt you!