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Corporate Restructuring

What is the Corporate Restructuring Strategy?

If you own a Corporation (or a Limited Liability Company that has elected to be treated as a corporation) that owes back IRS tax liabilities you may be able to eliminate a significant portion of your business tax debt by closing your current corporation and having our Tax Attorney negotiate a certificate of discharge of Federal Tax Lien..

This business restructuring strategy is one of the most powerful tools for eliminating tax debt, but it is also one of the most complex.  This is no walk in the park, but the higher your debt and the lower your assets, the more savings we can show you.

What are the Risks involved?

The absolutely most important factor is that the government approves of the plan BEFORE you start.  If you do not get their approval, you could face fraud charges, but in the very least you could be subject to a nominee, transferee or alter-ego tax lien.   If this happened then the business purchasing the assets could be assessed the old corporation’s tax liability and would effectively be in the same position as the old corporation.

The company purchasing the old corporate assets must be fundamentally different.  Here is a checklist of the “badges of fraud” that the IRS will look for.  If you get the IRS’ approval beforehand, the plan you present to them will account for all of these.

  • Transfer of assets lacks fair consideration:  if you are going to transfer any assets, they must be transferred at a fair price.  You cannot give assets away to anyone, especially when a tax lien is attached to that asset.
  • The transfer is to a closely related person:  transfers to and from family members or other shareholders in a company are seen as an inside trade and will raise suspicion on the activity.
  • The transferor retains enjoyment, possession or control after the transfer:  if you sell your truck to a friend, but he still lets you drive it you will raise suspicion.
  • The transfer was concealed:  if the transfer is not made in the usual manner, the government will question it.  For example if a security interest (UCC filing, Security Agreement) would normally be filed but was not then it might not look legitimate.
  • Before the transfer, the transferor was sued or threatened with a suit:  if you are threatened with a lawsuit and you try to hide your assets after the fact, this is seen as fraud.  You are denying potential creditors their right to assets that they might have a claim to later.
  • The transferor left the jurisdiction secretly:  if you sell an asset and run for Mexico the next day, chances are the transfer will be seen as fraud because you are probably evading creditors.
  • The transferor concealed assets:  again, if you plan to move your fleet of trucks to Mexico until this tax debt is over this is fraud.  You must clearly report all assets and their value.
  • The transferor was insolvent at the time of the transfer or shortly after:  insolvent means that your debt and expenses exceed your assets and income.  If you are subject to the insolvency laws of your state, selling or otherwise disposing of assets is illegal and considered fraud.
  • The transferor conveyed the essential assets of a business to a lien holder who then transferred the assets to an insider:  some people think they are being clever with this one.  If you owe Joe money, sell him some business assets.  Then Joe can transfer the assets right back to one of the shareholders and the business can once again use that asset.  That is fraud and it is illegal.

This list is not all-inclusive – in general the key points that the IRS is going to be looking for is that any assets are properly accounted for and if they are transferred the proper creditors are paid, with the senior secured creditor having priority.

Transfers to insiders are shady at best – though many times through negotiation we can work around this argument (e.g.: if Joe wants to sell the assets of his business to his son, who plans to open and operate a similar business, we have successfully negotiated the government’s agreement to this without fraud becoming an issue).  The new business has to be a separate and distinct entity and the transaction acquiring the assets of the old must be an “arms length transaction”. 

The key to understanding this strategy is that the IRS only has a claim to the assets based on their lien priority.  If someone else filed a lien first, they are senior to the IRS as a creditor.  With most corporations that owe back taxes there will be minimal assets most of which are subject to priority lien holders.  Meaning the IRS interest in such assets through their tax lien is nil or very small and they will not be paid much if anything when the corporation closes and these assets sell.  What isn’t paid through the sale of the assets will be placed in a currently not collectible status and provided the corporation has no income, other assets and is never reopened the debt will stay in this currently uncollectible status until the Collection Statute expires.

What about the Trust Fund Recovery Penalty?

If the corporation owes trust fund taxes, like employment taxes then any individual within the corporation who is willful and responsible for the non payment of these taxes can be assessed the Trust Fund Recovery Penalty for an amount equal to the actual amounts withheld from the employees.  This will almost always include the owners and officers of the corporation.   So why go through with this strategy?  The rule of thumb is that the Trust Fund will be about 55% of the debt so by employing this strategy you may be able to eliminate the other 45% of the corporate IRS tax debt.  Furthermore, if you don’t have sufficient personal assets or income to pay the Trust Fund portion (55%) then you qualify for the IRS Offer in Compromise Program wherein you can settle this Trust Portion for considerably less than what you’re actually assessed (along with any 1040 personal income tax liabilities you owe).

How Can I Start Another Company Doing the same thing?

If you worked as a carpenter before starting your corporation and this was what you knew and how you made your living, thenthe IRS can’t tell you that you can’t work as a carpenter anymore because you owned a corporation that was in the construction business and went belly up owing Federal taxes.  This means that you are allowed to come forward as a potential purchaser of the corporate assets and can buy them from your old corporation, provided you meet all the requirements discussed above.  So you could start a new business, buy the old corporate assets and start your new business fresh with a lot more experience and knowledge about how to run your business properly and never end up owing taxes again.

Your Next Steps

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