Who Is on the Hook When an LLC, Partnership, or S Corp Owes the IRS

The first question most business owners ask when the entity falls behind with the IRS is simple: can they come after me personally? The honest answer is that it depends, and it depends on three things. What kind of tax is owed. How the entity is classified for federal tax purposes. And what state law says about the owners' liability for the entity's debts.

Some owners panic when they did not need to. Others assume the LLC protects them and find out the hard way that it did not. Here is how the pieces fit.

Start with who the taxpayer is

The IRS collects a tax from the person or entity that owes it. So the first step is identifying the liable taxpayer for each tax and each period. IRM 5.1.21.5 directs revenue officers to do exactly that before taking collection action: determine whether the liable taxpayer is the single member owner or the LLC, whether the LLC has one member or several, and whether it made a classification election.

If the entity is the taxpayer, IRM 5.1.21.13.4 and 5.1.21.13.5 say the assets of the LLC, not the owner's assets, are subject to collection action. If the owner is the taxpayer, it runs the other way.

Partnerships and LLCs taxed as partnerships

Income tax flows through to the owners

A partnership generally does not pay income tax. IRM 5.1.21.13.2 notes that an LLC classified as a partnership files Form 1065 and issues Schedules K-1, and each member reports its share on its own return and is liable for any tax due on that return. If you owe tax on K-1 income, that is your personal liability, not the LLC's.

But some taxes and penalties land on the entity

• Employment taxes. IRM 5.1.21.13.5 says that when an LLC is classified as a partnership, the LLC is the employer and is liable for employment taxes.
• Late filing penalties. The IRC 6698 penalty for a late or incomplete Form 1065 is assessed against the partnership under IRC 6698(c). See our page on the Form 1065 late filing penalty.
• BBA imputed underpayments. Under the centralized audit regime, IRC 6232(a) says an imputed underpayment is assessed and collected as if it were a tax imposed for the adjustment year. It is the partnership's liability. Our guide to the imputed underpayment explains how it is computed.

General partners versus LLC members

This is where state law takes over, and the difference is large.

IRM 5.1.21.13.5 states that under state law, general partners are liable for the employment tax incurred by the partnership, just as they are liable for other debts of the partnership. IRM 5.17.7.2.1.3 adds that because general partners are individually liable under state law for partnership debts, assessments are made in the name of the partnership and the names of the general partners, citing the Supreme Court's decision in United States v. Galletti, 541 U.S. 114 (2004). The same IRM section notes that in a limited liability partnership, general partners may not be individually liable, depending on the jurisdiction.

LLC members are treated differently. IRM 5.1.21.13.5 says that under state law, members of an LLC are not liable for the debts of the LLC, so members of an LLC classified as a partnership are not directly liable for the LLC's employment tax liability.

So a general partnership offers no shield. An LLC generally does, for the entity's own debts.

The BBA exception that reaches partners

There is one federal rule that can push an entity level BBA liability onto partners. Under IRC 6232(f), if an imputed underpayment (with interest and penalties) is not paid within 10 days after notice and demand, the interest rate on that amount increases, and the IRS may assess each partner (determined as of the close of the adjustment year, or former partners if the partnership no longer exists) a tax equal to that partner's proportionate share. IRC 6232(f)(6)(B) generally limits that assessment to 2 years after the notice and demand. Payment by a partner reduces the partnership's liability. More on the regime is in our BBA partnership audit overview.

Single member LLCs: it depends on the tax

A single member LLC is disregarded by default under Treas. Reg. 301.7701-3(b)(1)(ii). But "disregarded" does not mean disregarded for everything.

Type of tax	Who is liable	Source
Income tax on the LLC's profits	The owner	Treas. Reg. 301.7701-2(a); IRM 5.1.21.13.3
Owner's self-employment tax	The owner	Treas. Reg. 301.7701-2(c)(2)(iv)(C)(2)
Employment taxes on wages paid on or after January 1, 2009	The LLC, treated as a corporation	Treas. Reg. 301.7701-2(c)(2)(iv); IRM 5.1.21.13.6.1
Certain excise taxes for periods beginning on or after January 1, 2008	The LLC, treated as a corporation	Treas. Reg. 301.7701-2(c)(2)(v); IRM 5.1.21.13.6.1
Employment taxes on wages paid before 2009	The owner	IRM 5.1.21.13.6

Treas. Reg. 301.7701-2(c)(2)(iv)(B) says a disregarded entity is treated as a corporation for employment taxes under Subtitle C. The regulation's example says the LLC must file Forms 941 and 940 under its own name and EIN and is liable for withholding, FICA, and FUTA. The individual owner is not an employee of the LLC and pays self-employment tax.

Treas. Reg. 301.7701-2(c)(2)(iii) adds that a disregarded entity is treated as separate from its owner for federal tax liabilities from any period when it was not disregarded. If your LLC used to be an S corporation or a partnership, those old liabilities stay with the entity.

And when the owner is the taxpayer, IRM 5.1.21.13.6 notes that state LLC statutes give the owner no direct ownership of the LLC's assets, so administrative collection for the owner's debts cannot be directed at LLC assets. IRM 5.1.21.6.3.1 requires a disclaimer on levies so they attach accounts in the owner's name but not accounts in the LLC's name.

S corporations

An S corporation is a corporation. Its income generally passes through to shareholders, who owe the income tax on their own returns. But the corporation is liable for its own employment taxes and for entity level penalties. The IRC 6699 penalty for a late Form 1120-S is assessed against the S corporation under IRC 6699(c). See our page on the Form 1120-S late filing penalty.

IRM 5.1.21.13.4 says that when an LLC is classified as an association taxable as a corporation, including an S corporation, the LLC is the employer and liable for employment taxes, and its members are the equivalent of shareholders. When the entity is the taxpayer, its assets, not the owners' assets, are subject to collection.

How the IRS collects from the entity

When the entity owes, IRM 5.1.21.6 describes the usual tools: collection due process notices, a notice of federal tax lien, notices of levy, and seizure. These are directed at the liable entity's name and EIN.

When an owner owes and the IRS wants to reach the owner's interest in the business, it is harder. IRM 5.1.21.6.3.2 says the IRS may serve a levy on the LLC to attach distributions payable to a liable member where the member's right to receive income is property under state law. IRM 5.1.21.9.1 describes a three step charging order process: reduce the claim to judgment, use the judgment in state court to charge the member's interest, and then receive distributions made under the order.

Ways owners end up liable anyway

• Taking the assets. IRC 6901 allows the IRS to assess transferee liability, at law or in equity, against a person who received the taxpayer's property. For income taxes, IRC 6901(a)(1) applies to transferees generally. For other taxes, IRC 6901(a)(2) applies when the liability arises on the liquidation of a partnership or corporation, or on a reorganization. Winding down an entity by distributing everything to the owners while taxes are unpaid invites this.
• Being a general partner. As noted above, state law can make general partners liable for partnership debts.
• Trust fund taxes. Separately, an owner or other responsible person who willfully fails to pay over withheld employment taxes can face the Trust Fund Recovery Penalty. That is its own topic, covered on our payroll tax page.

If you are not sure how your entity is classified, that has to be settled first. See our guide to LLC classification problems and Form 8832.

If your business owes the IRS and you need to know where your personal exposure starts and stops, call the Law Offices of Darrin T. Mish, P.A. in Tampa at 813-229-7100. The entity you formed can protect you, but only for the debts that actually belong to it.