In the past, one could easily form a corporate entity or LLC (often in Nevada) and even get a separate tax identification number, and leave it at that. If you did not conduct any business, you did not need to file an annual tax return. In the past, many people did not file tax returns for inactive businesses.
This article is my opinion, and not legal advice. I’m a trial expert, and I’m not a lawyer. If you ever need legal advice or a strategy to use, contact an attorney.
When the economy took a nosedive and the major clients of my consulting business withdrew, I decided to close my C corporation. Where I live, it costs me nearly $2,000 each year to keep my C corporation running, mostly because I have to pay state taxes and pay an accountant to do corporate tax returns. When revenues are low, it is expensive to keep corporate entities running.
In the good old days, the booming economy allowed the IRS to focus primarily on wage earners. Many people used to set up corporations or LLCs, and then just ignored them. Even if people obtained a tax identification number for their LLC or company; if they never did business, they did not file tax returns; and in the past, the IRS left them alone.
For more than a few years, the IRS has been charging a penalty for not filing a tax return. The penalty charged depends on the type of filing entity. In 2010, the IRS raised your penalties substantially.
Public Law 111-92, “Section 16 of the Worker, Homeowner, and Business Assistance Act of 2009” increased the penalty for failure to file partnership and S corporation tax returns (LLCs taxed as partnerships or S corporations) . The late filing penalty was raised from $89 per partner or shareholder to $195 per partner or shareholder for each full or partial month a business-related tax return was filed late.
People who own a “dormant” company registered somewhere for many years now receive tens of thousands of fines, even if their company did not earn a penny. Sometimes they didn’t even open a checking account, yet they or their lawyer, or some online site got them a tax ID number for their business, which means they now have to file a tax return on time or they will owe you money to the IRS.
If you have an LLC, C or S corporation, limited partnership, or irrevocable trust with a tax identification number; you must file a tax return for that tax number each year. It doesn’t matter if you owe taxes or if you do business; the tax return must be filed.
The IRS is very serious about your penalties. The IRS has tripled the number of agents in the last few years, and now they are trying to squeeze every penny. There seems to be no way to escape the penalties for those who don’t file on time, even when people can’t pay them.
If you have an entity related to the inactive business, order it now. If you bring it up first, the IRS may be willing to work with you to resolve your inactive tax ID entity situation.