Navigating the financial and legal aftermath of a business owner’s death is challenging in the best of times. Besides the grief, you’re often left with a messy pile of unfinished business — unpaid taxes, lingering debts, and creditors worried they won’t be paid.
To get through it all, you need the right guidance. This article is a high-level guide to navigating that maze, written for those who step up to handle the estate. To get customized help now, contact us at the Law Offices of Stephen B. Kass.
Key takeaways
- The executor or administrator is the fiduciary responsible for managing the deceased’s estate and business.
- Executors may become personally liable for the debts if they mismanage the estate or assets.
- A tax professional can help deal with the estate and address tax liabilities.
- Tax debts are urgent and should be prioritized. The IRS and NYS can pursue liens or levies against the estate’s assets and business itself.
- Proactive communication and documentation help when dealing with creditors and tax agencies.
A real-life case study
To understand how unfiled returns, back taxes, and other debts can affect a business owner’s estate after their death, let’s look at a case study.
Here’s what happened: A New York subcontractor’s unexpected death left his company in default on 15 in-progress jobs. The business owed a lot of money to suppliers and had fallen behind on payments to the IRS and the New York State Department of Taxation and Finance (NYS). The estate faced a daunting task: settling the business’s federal and NYS tax debts while managing the unfinished projects and protecting the state’s assets.
The family member engaged a tax attorney and granted them Power of Attorney (POA) for the corporation and the personal estate with both the IRS and NYS. This step was a game-changer because it gave the legal representative the right to talk to tax agencies, get transcripts, and provide a summary to the estate’s CPA, who started the process of preparing back tax returns.
The tax professional presented mock Chapter 11 bankruptcy schedules to three of the company’s major creditors to show the company’s financial distress and limited available assets. These schedules are a way to say, “Look, if this goes to court, you’ll probably get next to nothing. Let’s work this out now.” This strategic move helped show creditors the value of their claims if the business were to file for bankruptcy and encouraged them to negotiate a realistic settlement.
Can you imagine trying to navigate this process on your own? Is it possible? Yes. Is it easy? No. Is there a greater chance you might make a big mistake, costing you, the business, or both a lot of money? Absolutely. A tax professional knows how to leverage their knowledge and experience to get the best outcome possible for the business, the estate, and the deceased business owner’s family and professional partners.
Who’s responsible for the business and its debts?
When a business owner dies, their debts don’t magically disappear. The person who steps up to manage the estate — typically an executor named in the will or, if there isn’t one, a court-appointed administrator — is responsible for a variety of compliance concerns.
Think of them as an estate’s CEO (or fiduciary) who has a legal and ethical duty to act in the best interest of the estate and its beneficiaries. A fiduciary’s primary role? Inventorying assets, paying legitimate debts and taxes, and distributing the remaining assets to the heirs.
While the executor isn’t personally liable for the deceased’s debts, if they mismanage the estate or neglect their duties, the law can hold them accountable. What exposes an executor to personal liability?
- Ignoring tax notices.
- Failing to file necessary returns.
- Improperly distributing assets before debts are settled.
Taking proactive and informed steps from the outset will help protect the estate, its beneficiaries, and the executor from unnecessary legal and financial exposure.
Why tax debts are especially urgent
Tax debts stick to the business’s assets and, in some cases, the estate. In most cases, tax debts have priority against all other types of debts, except for debts with collateral where the lien was created prior to the tax debt.
Additionally, tax debts, particularly those owed to the IRS and NYS, pose a unique and immediate threat to an estate. Unlike other creditors, these agencies have significant power to seize assets. While most creditors have to go to court to get a judgment against you, the IRS and the NYS DTF don’t have to. Instead, they can issue tax liens, garnish wages, or seize bank accounts or other assets without court approval – they just have to provide the right notices and meet other procedural guidelines.
Another serious penalty exists: the Trust Fund Recovery Penalty (TFRP). This special IRS penalty for unpaid payroll taxes can be applied to the deceased owner and any “responsible person” in the business who had the power to collect and pay taxes (like payroll withholdings) and didn’t. This penalty immediately applies to the estate – the executor must prioritize it over certain other types of debt.
Addressing tax debts quickly, efficiently, and correctly is a big reason why you should move quickly and work with a tax professional.
Your immediate to-do list
If you’re dealing with closing down a business after the death of its owner, you should consider the following tips and strategies.
- Hire a tax pro. This most essential first step connects you with a professional who can file a Power of Attorney (Form 2848 for the IRS) on your behalf. Doing so makes them your official representative with the IRS and NYS. It also stops direct communication from these agencies with the estate, redirecting official notices to the professional who understands them.
- Pull the records. Your new tax professional can get the full story by pulling the IRS and NYS transcripts. These documents show all the filings, payments, and balances, providing a clear picture of what’s owed and to whom, and identifying errors or inconsistencies you should challenge.
- Find the paperwork. Gather all the business records you can find, like contracts, bills, payroll information, and bank statements. The more information you have, the easier it is for your tax professional and the estate’s CPA to figure out what’s what and determine whether they must prepare back returns.
- Team up. Make sure your tax professional, the estate CPA, and the estate attorney are on the same page. They should work together to protect the estate’s assets and confirm everything is handled correctly.
Talking to creditors
Dealing with creditors is stressful; ignoring them makes things worse. The best approach is to be proactive. In the story above, a tax professional showed the creditors a mock bankruptcy schedule, which is a fancy way of saying, “Here’s what you’d get if we went to court: not much.”
When prepared by a tax attorney, this document provides a realistic projection of what creditors would receive if the company were to file for bankruptcy. The reality is that in most business liquidations, general unsecured creditors receive little to nothing.
A mock bankruptcy schedule serves as a reality check, showing that you’re being serious and transparent. The estate is acting in good faith to resolve its debts, but its ability to pay is limited. It often encourages creditors to accept a smaller, more realistic payment rather than risk a lengthy legal battle with no payoff.
Why you need an experienced tax advisor who “gets it”
Estate cases involving a business are complex and require a specialized skill set, not a DIY approach. It’s a multi-layered situation involving corporate taxes, payroll filings, and business debts. A standard estate attorney or CPA may lack the specific knowledge needed to manage all these moving parts, especially the nuances of negotiating with government agencies.
A knowledgeable tax attorney understands the various layers of liability, from the individual’s final personal tax return to corporate returns and the potential for personal liability for certain business taxes. They can coordinate with the other professionals, handle all communication with the tax agencies and creditors, and prevent missteps that could end up costing the estate — and you — a lot of money.
Frequently Asked Questions
What happens to unpaid taxes when a New York business owner dies?
The debts become the estate’s problem. The IRS and NYS will seek payment from the assets left behind. However, this can vary based on the business’s structure, the type of debts, and how loans were secured or guaranteed.
Can the IRS or NYS go after the estate for business-related debt?
Absolutely. The estate is responsible for all the deceased’s debts, including any owed to the government.
Who handles tax filings for a deceased business owner?
The executor or administrator is responsible and usually hires a CPA to prepare and file all necessary returns.
Do I need a tax attorney if the estate includes a business with debts?
We recommend it. A good tax attorney can help you navigate complex rules, communicate with tax agencies, and negotiate settlements to protect that estate’s assets.
Can business debts be negotiated or reduced during estate administration?
Yes. Most creditors are willing to negotiate, especially when they see that an estate has limited funds. It’s in this scenario where a tax and debt expert can make a huge difference.
If you’re managing the estate of a New York business owner and facing unresolved tax or creditor issues, Stephen Kass can help. He works with estate representatives to handle business-related tax matters, reduce exposure, and negotiate realistic outcomes with taxing authorities and creditors. Contact us today to schedule a confidential consultation.
