How to Let the IRS Know Your Business Is Closed

Shutting down a business involves more than just closing the doors. The IRS and other government agencies must be notified to prevent unnecessary tax filings, penalties, or legal issues. Completing this process properly ensures the business is officially closed.

This requires filing final tax returns, handling payroll obligations, submitting dissolution documents, and deactivating the Employer Identification Number (EIN).

Filing Final Tax Returns

Businesses must file a final tax return for the year they cease operations, marking it as their last. Sole proprietors file a Schedule C with Form 1040, while partnerships and multi-member LLCs use Form 1065. Corporations file Form 1120 or 1120-S, depending on their tax classification. Each form includes a checkbox to indicate it is the final return.

Asset sales must be reported, including any gains or losses. Depreciation recapture applies if previously deducted assets are sold for more than their adjusted basis. For example, if equipment purchased for $50,000 with $30,000 in depreciation is sold for $25,000, a $5,000 recapture is taxed as ordinary income. Businesses with remaining inventory must either sell it or report it as distributed to owners.

Employment taxes must also be settled. Businesses with employees must file Form 941 or 944 for the final quarter or year and Form 940 for federal unemployment taxes. These forms must be marked as final, and W-2s and 1099s must be issued by the usual deadlines.

Closing Payroll Tax Accounts

Payroll tax accounts must be closed to prevent ongoing tax obligations. The IRS and state agencies must be informed that the business no longer has employees or payroll responsibilities.

All outstanding payroll tax deposits must be made before closing accounts. Federal payroll taxes, including withheld income tax, Social Security, and Medicare taxes, must be fully paid. Failure to do so can result in penalties under the Trust Fund Recovery Penalty (TFRP), which holds business owners personally liable for unpaid payroll taxes.

State payroll tax accounts also require closure. Each state has its own procedures for finalizing withholding and unemployment insurance tax obligations. For example, California requires filing a final DE 9 and DE 9C, while Texas requires a final report to the Workforce Commission. Businesses should verify state-specific requirements to ensure compliance.

Submitting Dissolution Documents

Formally dissolving the business with state agencies is necessary to avoid continued legal and tax obligations. Simply stopping operations does not eliminate the requirement to file annual reports, pay franchise taxes, or maintain regulatory compliance. Without proper dissolution, the business remains legally active and may incur penalties.

Corporations and LLCs must file Articles of Dissolution (or an equivalent document) with the Secretary of State where the business was formed. Some states require outstanding debts to be settled or tax clearance to be obtained before dissolution is approved. Texas requires a Certificate of Account Status from the Comptroller’s office, while New York mandates a final tax clearance from the Department of Taxation and Finance.

Businesses registered in multiple states must file withdrawal forms in each jurisdiction where they were authorized to operate. This process, known as Foreign Entity Withdrawal or Certificate of Surrender, formally ends the business’s authority in those states. Ignoring this requirement can result in continued annual fees and compliance obligations.

Deactivating Your EIN

An Employer Identification Number (EIN) is assigned permanently and cannot be erased from IRS records, but it can be marked inactive to prevent future tax filings.

To deactivate an EIN, businesses must send a formal request to the IRS, including the business’s legal name, EIN, address, and a statement confirming operations have ceased with no remaining tax liabilities. The request should be mailed to:

Internal Revenue Service
Cincinnati, OH 45999

There is no specific form for this request, and processing times can take months before the IRS updates its records.

Retaining Business Records

Even after closure, maintaining records is essential for tax compliance, legal protection, and potential audits. The IRS, state agencies, and creditors may request documentation years later.

Tax records, including filed returns, W-2s, 1099s, and payroll tax filings, should generally be kept for at least seven years. The IRS has three years to audit a return, but this extends to six years if significant income underreporting is suspected. Employment tax records, such as Forms 941 and 940, should be retained for at least four years after taxes were due or paid. Records related to asset purchases, depreciation schedules, and capital expenditures should be kept indefinitely.

Legal and financial documents, including contracts, corporate bylaws, partnership agreements, and dissolution filings, should be preserved for an extended period. Creditors or former business partners may bring claims years after closure, and having documentation readily available can help resolve disputes. Bank statements, loan agreements, and canceled checks should be stored for at least seven years. Insurance policies and business licenses should be retained as long as they remain relevant. Digital backups should also be created to prevent data loss.