Closing Your Business: What to Provide the IRS

As a business owner, the last thing you ever want to do is close your business for good. This can be a very difficult time. You may want to just walk away from the business and forget it ever happened.

Walking away may seem like the easy answer. It can, however, get you into some big problems with the IRS if you don’t provide them with the necessary information and payments.

To prevent IRS issues, here is what you need to do…

File Your Final Return

You need to file a final return for the year your business closed. The paperwork that you submit to the IRS depends on your type of business.

Sole Proprietor

A sole proprietor is an individual that owns an unincorporated business. Sole proprietors need to file Schedule C (Form 1040 or Form 1040-SR), Profit or Loss from Business. 

Also, when filing your individual tax return, you may need to include these forms:

• Form 4797, Sales of Business Property, for each year you sell or exchange property used in your business. This form is also required if closing your business causes the business use of an eligible property (Section 179) to drop 50% or less.
• Form 8594, Asset Acquisition Statement, if you sell your business.
• Schedule SE (Form 1040), Self-Employment Tax, if your business has net earnings of $400 or more.

Partnership

A partnership is a relationship between two or more individuals to do business or trade. If you are the partner of a business, you need to file Form 1065, U.S. Return of Partnership Income for the year the business closes. 

When you file you also need to:

• Fill out Schedule D (Form 1065) to report capital gains and losses. On that form, make sure you check the “final return” box near the top of the front page.
• The “final return” box also needs to be checked on the Schedule K-1,(Form 1065) Partner’s Share of Income, Deductions, Credits, Etc. 

Like a sole proprietor, you may be required to fill out Form 4797 and Form 8594 when applicable. 

Settle Wages and Taxes of Your Employees

If your business had employees, make sure they are paid their final wages. 

You also have to make final federal tax deposits and report employment taxes. If you don’t withhold or deposit employee income, medicare, and Social Security taxes, you may be assessed a Trust Fund Recovery Penalty (TFRP) leading to the IRS to take collection action against you.

The forms you may need to file include:

• Form 941, Employer’s Quarterly Federal Tax Return (or Form 944, Employer’s Annual Federal Tax Return for the quarter in which you make the final wage payments). Be sure to check the box indicating your business was closed and write the date final wages were paid on the form. Also, attach a statement that lets the IRS know who is keeping the payroll records and the address they are kept.
• Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for the calendar year you paid final wages. Check box “d” in the Type of Return section to indicate a final return.

You must also give each employee a Form W-2, Wage and Tax Statement for the calendar year that you paid their final wages. You also file Form W-3, Transmittal of Income and Tax Statements to the Social Security Administration.  

If your employees received tips, you need to file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips.

Pay the Taxes You Owe

Avoid interest and penalties by paying any tax debt you owe as soon as possible. If your tax debt is more than you can pay, you may want to consider applying for a Payment Plan or Offer in Compromise.

Report Payments to Contract Workers

Any contractor you paid over $600 for services (including materials and parts) for the calendar year your business closed needs their payments reported. You can do this by using Form 1099-NEC, Nonemployee Compensation.

Then you will need to send copies of all Forms 1099 to the IRS along with Form 1096, Annual Summary and Transmittal of U.S. Information Returns.

Close Your IRS Business Account and Cancel Your EIN

Make sure all your required tax returns are filed and you’ve paid off any tax debt. Once that is taken care of, you can send the IRS a letter stating your desire to close your IRS business account.

In the letter, include the legal name of your business, the EIN, address, and the reason you wish to close the account. If you have the document the IRS sent you when you were first assigned an EIN, make a copy and include it with your letter.

Mail this information to:

Internal Revenue Service
Cincinnati, OH 45999

Keep Records of Everything

Whenever you send something to the IRS, it’s always a good idea to make a copy for your records. In addition to your tax returns and other forms required when closing your business, make sure you keep:

• Employment tax records for at least 4 years.
• Property records until the period of limitations expire for the year that you gave up the property. The period of limitations is a set time that you can amend your tax return to claim a refund/credit or the IRS can assess additional tax. 

Overwhelmed by the IRS Paperwork?

If you are closing your business, you’ve probably had a lot of things on your mind. Forgetting to file a certain form or pay taxes due may only make things more complicated (and expensive) down the line. 

If you need help filing returns or are having trouble paying off your tax debt, the Confidential Tax Relief Team can help you get back on track.

Our tax relief experts take time to understand your situation and find solutions to help you finally settle with the IRS.

Schedule a consultation today to see how we can help you.