Quick overview
When a business closes, unpaid federal taxes do not simply disappear. The IRS can continue collection actions against the business and, in many cases, against responsible individuals (for example, for unpaid payroll taxes). Establishing an installment agreement gives you a predictable monthly payment, halts many immediate collection steps, and creates a path to full repayment when feasible (Internal Revenue Service, “Installment agreements,” https://www.irs.gov/businesses/small-businesses-self-employed/installment-agreements).
Below I walk through who typically qualifies, what documentation you need, how the IRS evaluates requests, options for payroll-tax liabilities, common pitfalls, and practical next steps based on experience helping clients resolve closed-business tax debts.
Who is affected and who can apply
- Former sole proprietors: unpaid business taxes are generally your personal liability. You submit the request as an individual taxpayer.
- Dissolved partnerships, LLCs, and corporations: the entity owes tax, but responsible parties can be pursued (for example, for unpaid employment taxes).
- Responsible persons for payroll taxes: if the IRS assesses the Trust Fund Recovery Penalty (TFRP), the individual(s) identified can be personally liable even after the business closes (IRS, “Trust Fund Recovery Penalty,” https://www.irs.gov/businesses/small-businesses-self-employed/trust-fund-recovery-penalty).
Anyone with a federal tax liability (business or personal) can request an installment agreement; eligibility and documentation vary by the tax type and amount owed.
What documents and information to prepare
Gathering accurate paperwork before you apply speeds approval and improves your negotiation position. Typical items I ask clients to pull together include:
- Notices from the IRS (CP2000, CP14, balance due notices).
- Business closure paperwork: articles of dissolution, final payroll filings, Form 941 final quarter, final Form 940 if applicable.
- Financial statements: bank statements, recent paystubs, a current budget, and lists of assets and monthly living expenses.
- Completed collection forms, when required: often Form 9465 (Installment Agreement Request) and a financial statement such as Form 433-A (for individuals) or Form 433-B (for businesses).
In my practice, having one concise folder with these items reduces calls with the IRS and shortens review time.
How to apply (methods and best practices)
-
Online: For many taxpayers the fastest route is the IRS Online Payment Agreement tool (OPA). It supports individuals and small-business filers for many types of tax debt and shows available plans and payment amounts in real time (IRS, “Online payment agreement application,” https://www.irs.gov/payments/online-payment-agreement-application). I advise clients to try OPA first if they have a relatively straightforward balance and current returns filed.
-
By mail: File Form 9465, Installment Agreement Request, or include the request with your response to a bill. If the IRS requests more detailed financials, they may ask for Form 433-A or 433-B. Mail is slower but sometimes necessary for complex cases.
-
By phone or in-person (with an enrolled agent, CPA, or attorney representing you): If the case involves complicated payroll-tax issues or the Trust Fund Recovery Penalty, representation speeds fact-finding and negotiation.
Practical tip: propose a realistic payment that you can meet. Proposing too little often triggers additional documentation requests or denial.
How the IRS evaluates your request
The IRS looks at your ability to pay, the types of tax owed, and whether additional enforcement is necessary. Common evaluation factors:
- Your monthly net income and allowable living expenses.
- Liquid assets and nonexempt property.
- Type of tax debt (income tax vs. payroll tax). Payroll taxes are treated more strictly.
If you owe only a modest balance, you may qualify for a streamlined agreement with minimal paperwork. Larger balances often require a financial statement and supporting documents. The IRS also calculates payment proposals using its internal models (see our guide on how the IRS calculates installment agreement payment amounts for more detail: https://finhelp.io/glossary/how-the-irs-calculates-installment-agreement-payment-amounts/).
Special considerations for closed businesses
-
Payroll taxes and TFRP: Employment taxes withheld from employees’ pay (the ‘trust fund’ portion) are not the employer’s to keep. The IRS can assess the TFRP against responsible persons even after closure. Installment agreements for trust-fund liabilities are possible but treated more conservatively; in many cases prompt resolution or litigation strategy is required (IRS TFRP guidance: https://www.irs.gov/businesses/small-businesses-self-employed/trust-fund-recovery-penalty).
-
Liability flow: For sole proprietors, business tax debts generally flow to your Social Security number. For corporations, corporate assets are liable, but owners may still be subject to collection actions depending on guarantees or penalties. Confirm the entity status on the tax returns you filed and whether you signed any personal guarantees.
-
Final returns and returns filing: The IRS commonly requires that the final business returns (and any delinquent returns) be filed before approving an installment agreement.
Terms, length, and costs to expect
Installment agreements can run from a few months to several years depending on the balance and payment amount. The IRS offers different types of plans—including streamlined, short-term, and longer-term agreements—each with different documentation requirements and payment expectations (see our comparison of types of installment agreements: https://finhelp.io/glossary/comparing-installment-agreements-guaranteed-streamlined-and-partial-pay/).
Note: the IRS charges user fees for certain online and payment-method choices and interest and penalties continue to accrue on unpaid balances until paid in full (IRS installment agreement information: https://www.irs.gov/businesses/small-businesses-self-employed/installment-agreements). Check the IRS site or consult a tax professional for current fee amounts.
Effects on liens, levies, and collections
- Liens: If the IRS has already filed a federal tax lien, an installment agreement does not automatically remove the lien. In some cases, you can request lien withdrawal or subordination, but approval is discretionary and depends on full compliance and the type of agreement.
- Levies: Setting up an installment agreement can stop many active levy actions if the IRS accepts the plan and you keep payments current.
If you need a lien withdrawn—often to sell property or obtain financing—seek professional help; there are specific criteria and forms the IRS requires.
If the IRS denies your request or you default
- Denial: If denied, the IRS will explain why. Common reasons are an unrealistic payment offer, missing returns, or insufficient documentation. You can appeal the decision or provide additional information.
- Default: Missing payments or falling out of compliance (for example, not filing current returns) can cause default, which may reinstate collection activity and additional penalties. Our guide on reapplying after default explains common steps to restore compliance: https://finhelp.io/glossary/how-to-reapply-for-an-installment-agreement-after-default/.
Alternatives to an installment agreement
- Offer in Compromise (OIC): If you can prove that you cannot pay the full amount, an OIC might settle the debt for less. OICs require detailed financial disclosure and strict eligibility (IRS, Offer in Compromise, https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise).
- Currently Not Collectible (CNC): If your financial condition shows you cannot pay anything toward the debt now, CNC status can temporarily halt collection activity. However, interest and penalties typically continue to accrue (see our comparison of installment agreements and CNC: https://finhelp.io/glossary/choosing-between-an-installment-agreement-and-currently-not-collectible-status/).
Practical negotiation tips from practice
- Be organized: clear, chronological records reduce back-and-forth with IRS examiners.
- Start with online options: they save time for straightforward balances.
- Use direct debit when possible: it reduces defaults and is favored by the IRS.
- Address payroll taxes immediately: these debts carry higher enforcement risk and personal exposure.
- Consider representation: CPAs, enrolled agents, or tax attorneys can negotiate on your behalf and reduce errors in financial disclosures.
In my experience, taking early action—before liens escalate—gives former business owners more options and better monthly payment terms.
Next steps checklist
- Confirm all business and payroll tax returns are filed and obtain the IRS notices showing balances.
- Collect financial documents: bank statements, paystubs, asset lists, and living expenses.
- Try the IRS Online Payment Agreement tool for speed; if ineligible, prepare Form 9465 and the requested financial statements.
- If payroll taxes or TFRP are involved, consult a tax professional immediately.
- Keep all payments current and file future returns on time to avoid default.
Final notes and professional disclaimer
This article is educational and reflects professional experience helping clients resolve closed-business tax debts. It is not personalized tax or legal advice. Tax law and IRS procedures change; verify current forms and procedures at the IRS website (https://www.irs.gov) or consult a licensed tax professional for advice tailored to your situation.
Authoritative sources cited: Internal Revenue Service — Installment agreements (https://www.irs.gov/businesses/small-businesses-self-employed/installment-agreements); Online payment agreement (https://www.irs.gov/payments/online-payment-agreement-application); Trust Fund Recovery Penalty (https://www.irs.gov/businesses/small-businesses-self-employed/trust-fund-recovery-penalty); Offer in Compromise (https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise).
Related guides on FinHelp:
- How to Apply for an Installment Agreement Online: Step-by-Step — https://finhelp.io/glossary/how-to-apply-for-an-installment-agreement-online-step-by-step/
- How the IRS Calculates Installment Agreement Payment Amounts — https://finhelp.io/glossary/how-the-irs-calculates-installment-agreement-payment-amounts/
- Choosing Between an Installment Agreement and Currently Not Collectible Status — https://finhelp.io/glossary/choosing-between-an-installment-agreement-and-currently-not-collectible-status/
If you’d like, consult a CPA, enrolled agent, or tax attorney for help preparing and negotiating your installment agreement request.
