Business Closure for Unpaid Arkansas Taxes
If you don't pay or file your business taxes in Arkansas, the state can shut down your business. There are very specific legal guidelines on when this can happen, and you do have appeal rights. But the risk is significant.
To protect your business, reach out to a licensed tax professional who has experience with the Arkansas Department of Finance and Administration (DFA). They can answer your questions, minimize your risks, and help you get back into compliance.
Key takeaways
- The DFA can shut down your business for three unpaid or unfiled tax returns in a 24-month period.
- Failure to pay sales tax or interest/penalties can lead to the loss of your sales tax certificate.
- Before shutting your business, the DFA must give you a five-day warning.
- You must appeal or get back into compliance within five days, or you will be shut down.
- Use TaxCure to find an AR-based tax professional.
When can the Arkansas DFA shut down your business?
The AR DFA can shut down your business if you have three of the following violations in any 24-month period:
- Failure to report gross receipts or compensating use tax.
- Failure to report state income tax withholding for employees.
- Failure to pay either of these taxes.
For example, say that you don't file or pay gross receipts tax – that's two violations. Then, you file a withholding tax return, but you don't pay – that's your third violation. If that occurs within a 24-month period, the DFA will contact you about closing your business.
What to expect if the DFA decides to close your business
If you're not compliant with your reporting or payment requirements, the DFA will send you a notice explaining that a third issue in any consecutive 24-month period will lead to business closure. Typically, they send this notice after two delinquencies.
Once a third problem occurs, the DFA will send you another notice (through certified mail or by hand delivery) saying that you have five business days to get back into compliance. At this point, you can avoid closure by:
- Filing all delinquent business tax returns.
- Paying all the delinquent taxes plus interest and penalties.
- Setting up a payment arrangement if you can't pay the tax and penalties in full.
If you don't appeal or take any of those steps within five days, the State can and will shut down your business.
How to appeal if the DFA threatens to shut your business
The notice you receive will have instructions on how to appeal the closure of your business – but in most cases, you can start the process online through the Commission's website on the petition input page. You must file the petition by the deadline on the notice – typically five days.
The petition should explain why you disagree with the proposal to shut down your business. You should also attach a copy of the notice. Unfortunately, mistakes can lead to an instant rejection, so to protect your business, you should strongly consider working with a tax professional who's experienced with business tax problems.
Then, the Tax Appeals Commission will contact you about your case and what to expect – the process is similar to a court case but less formal. The Commission acts as a neutral party to help you and the DFA come to an agreement. In the case of a business closure, the options are generally to get back into compliance by filing unfiled returns and/or setting up payment arrangements.
However, if applicable, you may be able to dispute the validity of the DFA's claim – for instance, if they're recommending a shutdown due to three violations, but you've only had one, that's something you can discuss during appeals.
If you disagree with the Commission's decision, you generally have the right to appeal. You must appeal to the circuit court within 20 days of the decision or dismissal.
What if you don't pay Arkansas sales tax?
Failure to pay AR sales tax can cause the state to shut down your business even faster than what's noted above. The DFA can rescind or refuse to renew your sales tax license if you owe any unpaid tax to the state or if you owe any interest and penalties to the state. In particular, the state looks for taxpayers who stay three tax periods behind.
For example, say that you pay a few months of sales tax liabilities late, and you incur interest and penalties for each of those months. You pay the sales tax but don't pay the interest and penalties. Once you incur three or more months of owing interest and penalties, the DFA may revoke your sales tax license.
Although that doesn't technically shutter your business, it makes it illegal to sell any taxable goods or services. That means you either lose your business or you must pivot to something that doesn't involve selling taxable goods or services, which isn't realistic with most business models.
Note that in Arkansas, the gross receipts tax and the sales tax are related in a way that they aren't in most states, and it's important to understand this distinction if you run a business in this state.
What is the gross receipts tax in Arkansas?
The gross receipts tax is a tax on all of your sales of taxable goods and services in the state. However, in most cases, you report the gross receipts and claim an exemption for the sales tax you collected. Then, you just pay the sales tax.
If you failed to collect the sales tax, you'd still owe the gross receipts tax. This setup allows the Arkansas DFA to collect taxes from businesses even if the businesses haven't registered for a sales tax account or collected any sales tax. It's confusing – but if your business is in compliance, you typically just pay sales tax but file a slightly more complicated form.
In contrast, many other states with a gross receipts tax apply that tax to the business's revenue. Then, they deal with sales tax using a different form, and the sales tax is collected from the customers and remitted to the state.
Other consequences of unpaid business taxes
Business closure isn't the only risk you face if you don't pay taxes in Arkansas. The DFA may also take the following actions:
- Wage garnishment – if you have an employer, the state can garnish your wages for unpaid taxes.
- Bank levy – the state can seize the funds in your bank account for delinquent taxes and penalties.
- Asset seizure – the DFA can also seize inventory, equipment, real estate, and other business assets, but that tends to be a last resort.
The DFA may also hold you personally liable for many business taxes. Regardless of your business structure, you may be held responsible for withholding and sales tax. In cases of co-mingling (where you regularly mix business and personal funds), the DFA can often hold you liable for any unpaid business taxes even if the business is a corporation.
Options to catch up on back taxes
If you owe back taxes to the DFA, consider reaching out to learn more about the following relief options:
- Installment agreement – monthly payments on state tax debt.
- Offer in compromise – prove insolvency and settle for less than owed.
You should also apply for penalty abatement to help reduce or eliminate penalties, which can help to lower your total amount due and make it easier to get back on track.
What if you decide to close your Arkansas business?
If you voluntarily decide to close your business, you must file final tax returns with the state and the IRS. You also must pay any tax due. If the business is insolvent, you may be able to avoid paying certain taxes, but that depends on the structure of the business and the type of tax involved.
For example, if the business is a corporation, you may not need to pay federal corporate income tax if the business is insolvent. However, if the business was a sole prop, a partnership, or an S-corp, you are personally liable for any federal income taxes due.
On the state level, you may be held personally liable for sales tax and Arkansas state withholding, regardless of the structure of your business.
The State of Arkansas requires a business closure form to shut down your withholding tax account. On the form, you must note when you're closing and why you're closing. If you're planning to keep operating under a new EIN, you'll need to note that as well. You also must indicate if you plan to stay in business but are closing this account due to getting rid of your employees.
Can the IRS shut down your business for unpaid taxes?
The IRS doesn't have the ability to rescind business licenses or sales tax certificates, as those are all issued on the state level. But the IRS has the power to seize most of your business assets for unpaid federal taxes, and that can effectively shut down your business. That's why it's critical to deal with unpaid state or federal taxes proactively.
Protect your business – get back into compliance now
To protect your business, you may need to work with a licensed tax resolution professional. Finding the best tax relief company can be challenging – especially since the companies that tend to advertise the most are often the worst option. But that's where TaxCure comes in – our website makes it easy to search for tax pros.
Start your search by selecting the AR DFA or the IRS if you're having federal tax problems. Then, narrow down the results to see pros who have experience with your specific tax problem or the solution you want. Then, look at the options, read over reviews, and contact a pro.
Or check out the following links to see lists of Arkansas tax professionals: