Can the IRS Audit a Dissolved Business?
I’m often asked by business owners whether the IRS can audit a business once it’s closed or dissolved. Like with many tax law questions, the answer is: it depends. That being said, there are some rules that apply with IRS audits and how they apply to dissolved businesses.
Generally, the IRS considers returns that were filed in the last three years for audit purposes. However, they may go back further and ask for additional years if they identify substantial errors or issues in the audit. The IRS typically does not go back more than six years for audits of dissolved businesses. If the IRS suspects fraud, or you did not file a return on behalf of your business, then the IRS can go back beyond six years for audit purposes.
The statute of limitations for audits is in place in order to limit the time the IRS had to assess additional tax on the business, or closed business. The statute is generally three years after a return is due or was filed, whichever is later. If you are in the midst of an audit that’s not resolved, the IRS may request extending the statute of limitations.
Extending the statute can work in your favor in that it gives the business owner more time to gather and provide documentation to support your position. It also gives you time to request an appeal if you do not agree with the audit results. According to the IRS, you do not have to agree to extend the statute of limitations date. However if you don’t agree, the auditor will be forced to make a determination based upon the information provided. This is where you should enlist the help of an experienced tax attorney who can help you interact with the IRS and advocate for you with the statute of limitations.
It’s critical to save your business records even if your company is dissolved. These include detailed records of income, expenses, payroll reports and any tax-related items (sales tax included). Accountants generally recommend keeping records for seven years. This covers you in the six year audit timeframe, or if you need to file an amended tax return. These same recommendations apply for state tax agencies as well. While the majority of audits come from the IRS, your state tax department may wish to audit your closed business and each state has its own statutes of limitations.
Something important to keep in mind is that the final tax return for your closed business determines the last year the company was operating. So if you never filed a final return, the statute of limitations to audit a closed business never begins. Some states, such as California, may impose an annual minimum tax until the company is formally dissolved.
When you’re closing a business, it’s important to work with an experienced business and tax attorney who can help you make sure you dissolve your company properly, and you are less at risk for audit in the future. Nobody wants to face an IRS or state tax audit. But a tax attorney has experience in these areas and can assure you are protected.
Allison Soares is a partner and tax attorney at Vanst Law. Before starting her own practice, Soares was a partner at a tax law firm where she honed her skills handling a wide variety of tax and employment-related cases. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.