I recently posted a response to a Business Audit question on Lawyers.com. I am happy to share the question and response on the blog as well:

Question: “I own a business here in Connecticut and I was audited; I do not have the money and the business is not doing well; can I close the business and if I do, I have nothing, will I be held for those taxes? The business is a LLC.”

Answer: You can shut down the business but that may not end your tax obligations with the IRS or state of Connecticut. The IRS or Connecticut may or may not pursue the business for the tax liability or may or may not asset a Trust Fund Recovery Penalty TFRP against you as an individual. THE TFRP is a penalty imposed on individuals who have financial control over the business. Specifically it is designed to penalize those who had control over the decision of where to divert assets to other creditors rather than paying IRS or Connecticut payroll taxes. The actual penalty imposed is equal to the income taxes, social security taxes, and Medicare taxes withheld from employee paychecks. If nothing is done during the audit, the IRS will likely disallow all expenses and may or may not adjust income depending on the specific facts and circumstances surrounding your audit. Fortunately, there are mechanisms for helping taxpayers try to resolve their liabilities. It may be possible to pursue a settlement agreement to compromise the tax liability for an amount less than you currently owe. It may be possible to seek a penalty waiver to reduce the penalties on some or all tax periods.  Additionally, it may be possible to enter into a payment arrangement to make monthly payments until the balance is paid in full. It might also be possible to pursue Bankruptcy.