IRS explains who is a "predecessor employer"

for employment tax levy purposes

Taxpayers with big employment tax liabilities sometimes start new companies to operate the business.  The hope is that the new company can go forward free of the old tax problems.  In a recent "program manager's tax advice" (on a somewhat different issue), the IRS explained the factors it considers in determining when a company can be considered the "predecessor employer" of another.

According to the recent guidance, IRS should use the following factors to determine if a business is a "predecessor" of the taxpayer:

(1) The taxpayer has substantially the same owner(s) or shareholder(s) and the same officer(s) as the prior business.

(2) The same individual(s) is (are) actively involved in running the taxpayer that were actively involved in running the prior business, regardless of whether they are officially listed as the owners/shareholders/officers.

(3) There is no evidence that the taxpayer's owner(s) or shareholder(s), if different than before, acquired the business in an arms-length transaction for fair market value.

(4) The taxpayer provides substantially the same product(s), service(s), or function(s) as the prior business.

(5) The taxpayer has substantially the same customers as the prior business.

(6) The taxpayer has substantially the same assets as the prior business.

(7) The taxpayer has the same location/telephone number/fax number, etc. as the prior business.

A business won't be treated as a predecessor if there has been a genuine change in control and ownership of the business. A genuine change in control and ownership of the business exists if: (a) it was acquired in an arms-length transaction for fair market value; and (b) the previous owner(s) has (have) ceased all involvement in running the business. If the previous owner serves for a limited period as a consultant to the new business solely in an advisory capacity, then the prior owner should not be treated as having any involvement in running the new business.

Example:  Badnews, Inc. operated a service business with a number of employees.  It did not pay $100,000 in employment taxes.  Badnews conveyed its assets and business to a new company, Goodnews, LLC.  Goodnews has the same owners as Badnews and operates in the same location.  IRS will most likely pursue the $100,000 in unpaid tax against Goodnews.