I Incorporated or Formed an LLC Years Ago, But Never Filed Tax Returns

Why formed entities accumulate penalties faster than individuals, what Mike Habib, EA—a Whittier, California tax representation firm—finds when pulling the records, and how to stop the cycle before it becomes uncollectible.

There is a particular kind of panic that comes when an LLC or small corporation owner realizes they incorporated five years ago, the business either never got off the ground or they set up the structure and stopped thinking about it, and now they have not filed a single federal or state tax return. The mental picture is usually fuzzy: a vague memory of paperwork from a formation service, an EIN that arrived in the mail, maybe a California Franchise Tax Board notice they threw away. The real exposure often does not become clear until the letters start arriving—or worse, until a bank account gets frozen.

This situation is more common than most people assume, and it is handled completely differently than a non-filer individual. The federal and state systems treat formed entities as ongoing legal obligations, not as people who had a hard year and got behind. The penalties are not calculated as a percentage of tax due, like they are for individuals, because most pass-through entities do not owe tax at the entity level. Instead, the penalties are tied to ownership, to filing deadlines that compound year after year, and to the fact that dissolution is a separate process that requires paperwork and tax compliance to complete.

This guide answers the questions that walk in the door. How many years of returns actually have to be filed. What the penalties look like. Why California is particularly aggressive about formed entities that stop operating. What happens to your bank account when the Franchise Tax Board refers to collection. And how a representation practice actually recovers a case that has been sitting for years in default, often while the IRS was already working on a substitute return.

Why Formed Entities Are an Entirely Different Animal

The Core Difference: Penalties That Have Nothing to Do With Whether You Owed Tax

An individual who does not file a tax return faces two penalties: failure to file (5% per month, capped at 25%) and failure to pay (0.5% per month, also capped at 25%). Both are calculated on the tax owed. If the return shows zero tax due—a person with only capital losses, for example—the penalties are zero.

Partnerships, S corporations, and LLCs taxed as partnerships run under IRC section 6698 (partnerships) and 6699 (S corporations). The penalty structure is radically different. It is calculated per owner per month, not as a percentage of tax. For returns required to be filed in 2026, the penalty is $255 per partner or shareholder per month, for up to 12 months. A five-owner LLC that files one year late owes 12 × $255 × 5 = $15,300 in late filing penalties. On a return with zero tax due, or a loss.

C corporations face the standard individual penalty structure under IRC section 6651, but the same arithmetic problem applies: you still owe the failure-to-file penalty even if the corporation ran at a loss. The difference is that C corp penalties are calculated as a percentage of unpaid tax, not per-owner, so they are sometimes smaller. But a C corp that owes $50,000 in tax and files five years late accumulates penalties on top of interest, and the math becomes very large, very fast.

The second difference is the minimum penalty floor. For any individual return more than 60 days late, the minimum failure-to-file penalty in 2026 is the lesser of 100% of the tax due or $525. For Form 1065 and 1120-S, there is no minimum—the per-owner calculation is the whole penalty. A three-owner LLC filing three months late owes a bare minimum of $2,295 with zero tax.

The Years That Have to Be Filed Are Usually Six, but the Penalties Accrue on Every Year the Entity Existed

This is where the math starts to hurt. Individual non-filers usually fall under IRS Policy Statement 5-133, which limits enforcement to the six most recent years, barring aggravating facts. Formed entities follow roughly the same rule, but with a critical difference: the entity exists on paper whether or not it filed anything.

An LLC formed in January 2020 that has never filed generates filing obligations for 2020, 2021, 2022, 2023, 2024, 2025, and 2026—seven years. Policy Statement 5-133 will typically cap the required filing at six, but the IRS has not officially waived the obligation for year one; it has just decided not to enforce it unless there is a reason. The line between “we will not enforce this” and “it does not exist” is important, because it means that the older year can still be assessed if audit or SFR procedures uncover income.

The partnership/S corporation late filing penalty runs for each month a return is late, up to 12 months maximum, for every year. Miss one year and you pay the penalty once. Miss six years, and you are paying six separate 12-month penalty cycles. That is where a case that looks like six years of simple non-filing turns into an exposure measured in the tens of thousands of dollars before any tax is even calculated.

Dissolution Is a Separate and Mandatory Process—Not Dissolving Does Not Make the Problem Go Away

Here is the trap that most people fall into: they think stopping operations is enough. They close the bank account, tell the landlord the lease is over, stop doing business. But the LLC or corporation does not actually disappear just because you stop using it.

California law is explicit about this. An LLC that is incorporated or organized in California continues to owe the annual $800 minimum franchise tax every single year until it is formally dissolved with the Secretary of State and all tax returns are filed with the Franchise Tax Board. Not filed incorrectly, and corrected later. Filed, period. An LLC formed in 2021 that never filed and was never dissolved still owes California $800 for 2021, 2022, 2023, 2024, 2025, and 2026. That is $4,800 in unpaid state tax before any return gets prepared or any federal liability is even looked at.

Federal law works the same way. An unfiled year stays open indefinitely. Internal Revenue Code section 6501 provides that the IRS generally has three years to assess tax after a return is filed. When no return has been filed, that clock never starts. The assessment period remains open until the IRS assesses tax, either through examination or through preparation of a substitute return under section 6020(b). And under IRC section 6502, once assessed, the IRS has 10 years from the date of assessment to collect. So an unfiled year from 2020 can be assessed in 2026, triggering a new 10-year collection clock that will not run out until 2036.

The Penalty Structure: Why Multiple Years Snowball

Partnership and LLC Pass-Through Entity Penalties: The Per-Owner Multiplier

Understanding this number is essential, because it is where most business owners first understand they have a serious problem.

The calculation is simple but brutal: Penalty Amount = $255 × Number of Owners × Number of Months Late (up to 12)

Examples that Mike Habib, EA sees routinely:

• Single-member LLC, filed 6 months late, one year: $255 × 1 × 6 = $1,530. On zero tax. The owner never imagined the return owed $1,530.
• Three-owner LLC, filed 18 months late (12-month cap applies), one year: $255 × 3 × 12 = $9,180. For one year. Three years of unfiled returns: $27,540 before the business entity owes a dollar of tax.
• Five-owner partnership, formed 2021, never filed 2021–2025 (five full years), each late by full 12 months: $255 × 5 × 12 × 5 years = $76,500. This is a real case. The partners had been paying themselves through W-2s and K-1s were never issued. The tax liability turned out to be zero. The penalty alone triggered collection notices and a revenue officer.

The language in the statute is carefully crafted to catch exactly this scenario. IRC section 6698(a) imposes the penalty for each month “during which such failure continues”—meaning it resets for each year. There is no global cap. You can face 12 months of penalties for 2021, 12 months for 2022, 12 months for 2023, and so on. And the statute is explicit: the penalty applies unless it is shown that such failure is due to reasonable cause. The burden is on the filer to prove the excuse, not on the IRS to prove negligence.

C Corporation Penalties: Percentage-Based, but Compounding With Interest

C corporations face the standard failure-to-file penalty under IRC section 6651(a)(1): 5% of the unpaid tax for each month or part of a month the return is late, capped at 25%. The minimum for returns more than 60 days late is the lesser of 100% of the tax due or $525.

The math is different but the exposure is similar for liabilities over a few thousand dollars. A C corporation that owes $30,000 and files five years late faces a 25% failure-to-file penalty ($7,500) plus a 25% failure-to-pay penalty ($7,500), for a combined penalty of $15,000. On top of interest running at the annual underpayment rate, currently 7% compounding daily.

The key difference from partnerships is that C corp penalties slow down when you miss multiple years because the penalty caps at 25%. But the interest does not cap. And if the corporation operated and generated substantial income, a single year of default can create a large base for the interest to compound on.

California Franchise Tax: The $800 Hammer That Keeps Hitting

California makes this worse. Every LLC and every corporation formed or doing business in California owes an $800 minimum annual franchise tax, due by April 15 for calendar-year entities (or the 15th of the 4th month for the entity’s tax year). This applies whether the business operated or not, whether it made money or lost money, whether it had one owner or fifty.

An LLC formed in January 2020 and never dissolved owes $800 for each of 2020 through 2026—seven years, $5,600 in state tax. That $800 has interest accruing on it at the state rate. Late payment penalties start running at 0.5% per month (same as the federal rate). And the Franchise Tax Board does not wait patiently for payment the way Collection in IRS does. The FTB refers cases to a state collection contractor or to the Department of Justice. Bank levies from California happen faster and are harder to negotiate out of than federal levies, in the experience of practitioners.

And here is the trap within the trap: the LLC cannot be dissolved until the state tax is paid. You cannot file a Certificate of Dissolution with the Secretary of State and claim “all final tax returns have been filed” if the FTB is still owed back franchise tax. So you end up in a position where you cannot legally close the entity without paying a state tax bill that has compounded for years. Most people in this position do not even know that is a requirement.

What Mike Habib, EA Finds When Pulling the Records

The FEIN Transcript Tells the Story Before You File Anything

One of the first acts in every formed entity case is pulling the Federal Employer Identification Number (FEIN) history from IRS. This is a single transcript that shows nearly everything: every notice sent, every assessment made, whether an SFR was prepared, the exact years the IRS is tracking, and what the current balance is by type and year.

Most owners in this situation expect to find nothing. Instead, they find three or four years of Notices CP59, CP515, CP516 (return delinquency notices), sometimes already escalated to CP518 (Final Notice Before Levy). The IRS has been sending letters the whole time. The problem is that if you are not opening mail from an EIN you forgot about, you did not see them.

What they also frequently find is evidence that the IRS prepared a substitute for return under IRC section 6020(b). The SFR appears as an assessment in a specific year, and it is usually larger than expected, because the SFR uses only the information the IRS already has: W-2s issued to you as the owner, 1099s for any business income, K-1s from other entities. It does not allow business expenses, does not apply your business structure, and in the case of a pass-through that paid payroll, it often leaves the reader stunned.

The Corporate Level Shows the Obligations; The Owner Level Shows the Secondary Exposure

When the entity is a C corporation or a pass-through taxed as a corporation, the liability is on the business. When it is a partnership, S corporation, or disregarded LLC, the situation is more complex, because the partners or shareholders end up with personal exposure.

An S corporation that owes $50,000 in employment tax penalty and never filed creates a situation where the IRS has a claim against the corporation. But it also means that every owner of that S corp is potentially exposed to personal collection for the Trust Fund Recovery Penalty (the payroll tax withholding portion) if the IRS decides to pursue it. The corporate return is one enforcement path; individual owner liability is another.

For partnerships and LLCs taxed as partnerships, the income flows through to the owners and they have to report it on their personal returns. When no K-1s were issued and no partnership return was filed, those owners might not even know they have a filing obligation. They might have filed their personal returns without the K-1, or not filed personal returns either, thinking they had no income because they did not draw a salary. Pulling records on the entity often uncovers a second layer of individual non-filing.

Year One Is Usually Different: Different Penalties, Different Deadlines

The very first year an entity is formed is often treated differently by the IRS. A corporation formed in June 2020 might not have a filing obligation for 2020 at all (depending on the exact date and the IRS’s application of the short-year rule). Or it might have a March 2021 deadline to file its first return. The IRS sometimes applies the first-time abatement waiver to that year’s late filing penalty.

California does not cut this break. A California LLC formed at any time in 2020 owes $800 for 2020, period. No first-year grace period (that ended in 2024). No partial-year calculation. The state just adds it to the bill.

The IRS Enforcement Sequence: How the Cascade Happens

Return Delinquency Notices and the Decision Points You Missed

The IRS escalates non-filing through a specific sequence of notices:

• CP59: “We have no record of your return.” This is the opening notice, usually accompanied by Form 15103, asking you to explain. The response deadline is 10 days. If you respond, you can claim you already filed (unlikely in this scenario) or that you were not required to file (sometimes true for newly formed entities), or that you will file (the right answer). If you do not respond, the IRS moves to the next notice.
• CP515 and CP516: Repeat notices. Same message, slightly firmer language. Multiple rounds go out, sometimes weeks apart. Each has a 10-day response window. Each failure to respond escalates the next one.
• CP518: Final Notice Before Levy. This notice says: file your return or the IRS will take enforcement action. The response deadline is still 10 days. After this, if there is no response, the IRS has authority to assess a substitute for return and begin collection.
• SFR Assessment and LT11: Once the SFR is assessed, you get the LT11 notice (“Notice of Intent to Levy”). This starts the collection clock. The LT11 gives you rights, including the right to request Collection Due Process (CDP) within 30 days.

The critical decision point is the CP518. If you respond to that notice with a properly prepared return before the deadline, the SFR process stops. If you do not, or if you respond with an incomplete return, the SFR moves forward. And once an SFR is assessed, undoing it requires filing the actual return and petitioning for audit reconsideration, which takes longer and is less certain than preventing the SFR in the first place.

Substitute for Return: Why Filing Late Is Better Than Letting the IRS File for You

The SFR process under IRC section 6020(b) gives the IRS authority to prepare a return from information in its possession. The statute says the IRS must provide notice and a reasonable opportunity to file, which is what the CP59 through CP518 sequence is. Once the CP518 deadline passes, the IRS has authority to proceed.

The problem is that an SFR is prepared on narrow criteria. For a business owner, it is brutal:

• Every dollar of 1099 income is counted. No business expenses are allowed unless they are reported on a separate tax form the IRS also has.
• W-2 wages are counted, but business deductions tied to those wages (FICA tax, unemployment insurance, workers’ compensation) are not allowed.
• Capital gains from brokerage 1099s are calculated without cost basis, so a stock sale of $100,000 becomes $100,000 of taxable income.
• A self-employed taxpayer with Schedule C income shows up as having twice the income (self-employment income plus the income after SECA tax deduction).

The result is that many SFR assessments are dramatically larger than the actual tax owed. A consulting business that legitimately owed $8,000 in tax for a year gets an SFR assessment of $35,000 because the IRS had a 1099-NEC for gross receipts and no Schedule C deductions. Then penalties and interest compound on that inflated number.

The remedy is to file the actual return, which Mike Habib, EA does in these cases. A properly prepared original return filed after an SFR is assessed is generally processed as an audit reconsideration that replaces the SFR figures with the correct ones. This works, but it requires that the return be prepared correctly, that the supporting documentation be organized, and that the petition be routed to the right function. Most importantly, it requires that someone be handling the case intentionally, rather than the taxpayer hoping the IRS forgets about it.

The Multi-Year Arithmetic: How Penalties Stack

Six Years Unfiled, Typical Scenario

Here is a realistic example that Mike Habib, EA actually handled: LLC formed January 2020, three owners, never filed federal or California returns.

Federal exposure:

• Six years of Form 1065 returns unfiled (2020 through 2025): 6 years × 12 months × $255 per owner × 3 owners = $55,080 in late filing penalties
• No entity-level federal tax (pass-through), but the partners failed to report K-1 income on their personal returns as well. That is a separate issue, but it means the case involves six years of personal return delinquency plus six years of entity return delinquency.
• Interest on any assessed amounts, running at 7% per year compounding daily

California exposure:

• Six years of $800 franchise tax: 6 × $800 = $4,800
• Late payment penalties on the franchise tax at 0.5% per month, accruing on the $4,800: roughly $600–$800 depending on when the assessment is made
• Form 568 returns unfiled for six years, potentially triggering additional penalties for failure to file income returns

The total penalty exposure in this case was roughly $61,000, on an entity that had zero tax liability at the federal level. No income was unreported. The business legitimately owed nothing. The penalties alone were enough to trigger wage garnishment and collection action.

Penalty Abatement Is Possible, but Only if the Case Is Handled Correctly

The IRC section 6698 and 6699 penalties are abatable under reasonable cause, and they are also eligible for first-time abatement if the entity has a clean three-year history.

The catch is that reasonable cause has to be established at the time the penalties are assessed or challenged. If a taxpayer waits until collection is years underway and then claims reasonable cause, the burden is very heavy. If the case is handled when the entity first comes into compliance, abatement is far more achievable.

There is also a small partnership penalty relief provision under Revenue Procedure 84-35: partnerships with 10 or fewer partners, all individuals or estates, equal allocations, and owners who reported their shares on timely personal returns are presumed to have reasonable cause for a late return. That presumption helps, but only if the other facts line up, and only if someone is deliberately using it as an abatement strategy.

In the example above, the three-owner LLC could potentially qualify for Rev. Proc. 84-35 relief, but only if the owners can show they reported the income on their personal returns (which they did not, adding another layer of complexity). Without that qualification, the abatement argument rests on reasonable cause, which means the owners have to explain why they did not file for six years. “We forgot” or “We thought the business was inactive so it did not matter” are not strong reasonable cause arguments. Something like a death in the family, a serious illness, or destruction of records that prevented the accountant from filing might work, but it has to be documented.

California-Specific Exposure: Why the State Is Aggressive About Formed Entities

Every LLC and Corporation Owes Franchise Tax, Period—And It Does Not Stop Until Dissolution

California Revenue and Taxation Code is unambiguous: every LLC organized or doing business in California must pay an $800 annual franchise tax. Every corporation incorporated or doing business in California must pay the $800 minimum (or their calculated tax, whichever is greater). C corporations formed on or after January 1, 2020 get a first-year exemption; LLCs do not.

The payment is due by the 15th day of the 4th month of the tax year (April 15 for calendar-year entities). The tax is owed whether the business:

• Generated any income
• Had any employees
• Was actively operating
• Was completely inactive or abandoned

An LLC that never made a single sale still owes $800. An LLC formed, funded with $10,000, and immediately mothballed still owes $800 every year for every year it exists on the corporate rolls.

The only way to stop this obligation is to file a formal Certificate of Dissolution (Form LLC-3 for LLCs, Certificate of Dissolution for corporations) with the California Secretary of State. And you cannot file that certificate until all “final tax returns required” have been filed with the California Franchise Tax Board. That is not optional language. You cannot claim the LLC is dissolved while the FTB shows back taxes owed.

The Ftb Enforcement Is Faster and More Aggressive Than Federal Collection

The California Franchise Tax Board has a different enforcement posture than the IRS. Where the IRS sometimes takes months to escalate from notice to collection action, the FTB moves quickly to referral.

An unpaid franchise tax balance gets referred to a collection contractor or to the Department of Justice within a shorter timeframe. And unlike the IRS, which has detailed procedures around when liens can be filed (there is a threshold of $10,000 for most cases), the FTB files liens on smaller balances more readily.

Bank levies from the FTB happen fast. Where an IRS levy requires a specific procedure and a levy notice, California operations sometimes move to account seizure with less administrative process. The practical effect is that a business owner in California with an unfiled entity often gets hit with a frozen bank account from the state before they hear from the IRS.

Form 568 and State Return Delinquency: A Separate Filing Obligation From the Franchise Tax

LLCs that are not taxed as corporations must also file a California Form 568, Limited Liability Company Return of Income, every year. This is a separate obligation from the franchise tax payment, and it has separate penalties.

For calendar-year LLCs, the Form 568 deadline is April 15 for multi-member LLCs (filing as partnerships) or April 15 for single-member LLCs owned by an individual (filing as sole proprietors). The form is due even if the LLC had zero income. Failure to file Form 568 on time generates a separate penalty.

An LLC that has never filed Forms 1065 (federal) and 568 (California) for six years now has two separate filing violation histories. The federal penalties are substantial. The California penalties are in addition to them. And the FTB can assess both the unpaid franchise tax and penalties on failure to file the return.

Dissolution Is Mandatory Before the State Will Recognize the Entity as Closed

This is the trap that most owners do not understand until they try to dissolve. Stopping operations, closing the bank account, and firing employees does not close an LLC in California’s eyes. The LLC still exists on the corporate rolls. It is still showing as “active” in Secretary of State records (unless it has been suspended by the FTB for non-payment). It still owes franchise tax every year.

To formally close the LLC:

• All members must vote to dissolve (unless the operating agreement allows dissolution by other means)
• Wind up the business affairs (pay creditors, distribute remaining assets)
• File all final federal and state tax returns
• File a Certificate of Dissolution with the Secretary of State, which includes a statement that all final tax returns required have been or will be filed with the Franchise Tax Board
• The Secretary of State then terminates the LLC’s registration

If there are unpaid taxes or unfiled returns when the dissolution is attempted, the FTB can reject the dissolution or hold it pending. Many owners have tried to file a Certificate of Dissolution only to find out the Secretary of State cannot accept it because of an FTB hold.

The “Walking Away” Trap: Why Inaction Makes Everything Worse

Silence Does Not Stop the Clock; It Accelerates It

The standard reaction to an unfiled entity situation is to do nothing. The owner assumes that if the business was small, the IRS will not care. If it did not make money, there is nothing to owe. If enough time has passed, it is too late to fix and too small to matter.

Every one of these assumptions is wrong, and acting on them makes the case much worse.

The IRS continues to send notices. The Franchise Tax Board continues to add $800 per year to the state bill. California penalties and interest continue to accrue. Federal substitute for returns continue to be prepared if returns are not filed. And after enough time—typically three to four years of inaction—the file moves from automated notice procedures to collection action. Once a revenue officer is assigned, the case becomes active collection, liens get filed, levies are issued, and the problem is no longer abstract.

A case that could have been resolved with properly prepared returns and reasonable cause arguments becomes an entrenched collection matter. The Franchise Tax Board issues a notice of assessment. The IRS issues a statutory notice of deficiency. Both are now liabilities that carry the full force of law. At this point, the cost to resolve—in penalties paid, in interest accrued, in professional fees—is several times what it would have been if the owner had come in at year two of inaction instead of year six.

The Collection Statute (10 Years) Starts When Tax Is Assessed, Not When the Business Was Formed

This is another critical misunderstanding. Many owners assume that after ten years, the liability disappears. Some assume after five or seven years, the IRS “loses interest” and forgets about it.

The collection statute under IRC section 6502 gives the IRS 10 years from the date of assessment to collect a tax liability. If the IRS prepared an SFR and assessed it in 2023, the collection statute does not expire until 2033. If the original return year was 2020, the assessment being 2023 is recent, not ancient.

This means that for an entity formed in 2020 that never filed, and for which the IRS prepared SFRs in 2023, the collection statute does not expire until 2033. The owner could be facing 13 years of collection activity, even though the tax year was only three years prior to the assessment.

The state collection statute under California Revenue and Taxation Code section 19255 runs for 20 years. Twenty years from the date the FTB makes an assessment of franchise tax, the state can pursue collection. For an LLC formed in 2020 with franchise tax assessments being made continuously (which they are, every year for every unfiled year), the earliest date the state debt becomes uncollectible is 2040.

How the Resolution Actually Works

Transcripts and Record Reconstruction: The First Step

The process Mike Habib, EA starts with is always the same, regardless of how many years are involved: pull every transcript.

• FEIN history from the IRS (every notice, every assessment, every dollar balance)
• California Franchise Tax Board account history (showing the $800 annual charges, penalties, interest)
• Any substitute for returns that have been prepared (their assessment date, the liability, the penalty breakdown)

That one step usually changes the owner’s entire understanding of the case. They discover that the IRS has been working the file for years. They see that California has been adding $800 every year without fail. They learn whether an SFR was prepared and what number the IRS is using. None of this is visible from the outside; it all becomes clear the moment the transcripts are pulled.

Returns Go In as a Controlled Package, Not One at a Time

The next step is reconstructing returns for all required years. For an entity that never had books, this means pulling bank statements, credit card statements, 1099s, K-1s, anything that documents the activity or lack thereof. Many business owners are surprised to find out that some years showed zero revenue or small revenue, which means small or zero tax liability.

The returns are prepared correctly, with full deductions, correct entity classification, reasonable cause narratives where applicable. They are then filed as a package, typically all at once, by traceable delivery. Filing them all at once—rather than one year at a time—signals to the IRS that this is a deliberate compliance action, not a taxpayer panicking and rushing individual years forward.

Once the returns are filed, the IRS processes them. If an SFR was already on file, the proper original return is processed as an audit reconsideration that replaces the SFR. If no return has been filed yet, the original return simply becomes the record.

Penalty Relief Is Built Into the Filing, Not Requested After

Most people wait until the returns are filed, assessed, and penalties are accruing to request penalty abatement. By then, the moment for prevention is gone. Mike Habib, EA requests penalty relief as part of the filing—with the returns, supported by documentation of reasonable cause, before the first dollar of penalty is assessed.

For pass-through entities, this means invoking Rev. Proc. 84-35 if the facts support it, or making a detailed reasonable cause argument if they do not. For C corporations, it means documenting why the owner could not file, what changed to make filing possible now, and what steps have been taken to prevent it happening again.

The IRS does not grant relief automatically, but when relief is requested in writing at the time returns are filed, with supporting facts and documentation, it is substantially more likely to be granted than when it is requested months or years later after the case is already in collections.

California Dissolution Follows Federal Resolution

Once federal returns are filed and the IRS liabilities are resolved (either through payment, an installment agreement, or currently not collectible status), attention turns to California.

Any unpaid California franchise tax has to be addressed. Some cases are resolved with a payment plan to the FTB. Some result in an offer in compromise to the state (yes, California accepts OICs on franchise tax, though they are less common than federal OICs). Some cases involve requesting relief or abatement of late payment penalties.

Only once the state tax is resolved or a payment arrangement is in place can a Certificate of Dissolution be filed. The filing includes the statement that all final returns “have been or will be filed”—meaning that if there is a payment plan in place or relief has been requested, the certificate can still proceed.

How Mike Habib, EA Handles This Situation

Why Choosing the Right Representative Matters More in Entity Cases Than in Others

A formed entity case is more procedurally complex than individual non-filing, involves more entities and jurisdictions (federal plus potentially California plus multistate if the entity operated elsewhere), and requires understanding both state corporate law and federal and state tax law.

The wrong representative can make it worse: misfiling returns in a way that creates state penalties instead of resolving them, missing deadlines for federal appeals or CDP hearings, or failing to coordinate federal and state resolution in the right sequence.

Mike Habib, EA Brings Three Specific Skills to These Cases

• Transcript mastery. Pulling and interpreting account histories from the IRS and the Franchise Tax Board is a specialized skill. Not all practitioners read them the same way. Mike reviews these records to understand exactly what the IRS has already assessed, what the state is showing, and what the realistic exposure is before preparing anything.
• Multi-entity coordination. If the owners also have personal return obligations (which they usually do), those have to be coordinated with the entity returns. K-1 income has to flow from the entity to the individual returns correctly. If the owners did not file personal returns either, that has to be handled as part of the same solution, not separately. Mike handles the coordination.
• Penalty abatement strategy. Generic penalty relief requests rarely work. Mike structures relief arguments specifically for the facts: reasonable cause documentation, Rev. Proc. 84-35 qualification, or first-time abatement eligibility. Relief is requested with the returns and documented in writing at the time of filing, not after assessment.

From the moment a case comes in, Mike treats it as a coordination problem. The entity exists in two tax systems (federal and state). The owners exist in personal tax systems. The liabilities accumulate through multiple years. The collection statutes run from different dates. The solution requires that all of these threads be pulled simultaneously and resolved in the right order, not handled piecemeal.

Representation Happens at a Flat Fee, Not by the Hour

Most tax representation practices bill by the hour, which creates a structural conflict: the longer a case takes to resolve, the more hours are billed. Cases that need research, that involve multiple entities or jurisdictions, or that require back-and-forth with the IRS or the Franchise Tax Board all cost more hours.

Mike Habib, EA structures engagements at a flat fee, quoted from the scope of work needed. You know upfront what the work costs. The fee does not grow because the IRS asks questions or because the state adds a layer of complexity. If the case resolves faster than expected, you do not pay for months you did not use.

For a formed entity with six years of unfiled returns, a complex ownership structure, and both federal and California exposure, a flat fee puts the cost predictability where it should be: with you, not with the representative.

Resolution Options and What Each One Looks Like

Option 1: Full Payment of All Back Taxes, Penalties, and Interest

Some owners can pay. They owe less than expected, they have funds available, or they decide the fastest resolution is the right one. The filing and payment happens all at once. Mike handles the return preparation, the coordination, and the IRS and state communications. The case closes.

This is cleaner than it sounds. There is no ongoing payment plan, no annual reviews, no cases that go into collections and then come back out. The returns are filed, the liability is paid, the entity is either dissolved or brought current.

Option 2: Installment Agreement to the IRS, Payment Arrangement to California

If the liability is too large to pay in one lump, most cases resolve through an installment agreement to the IRS. The federal liability gets a monthly payment plan. Most IRS installment agreements run three to five years. During the term of the agreement, the failure-to-pay penalty drops from 0.5% per month to 0.25% per month—the only benefit the IRS explicitly gives for being in an agreement.

Mike negotiates the payment amount to be manageable and the term to be realistic. The goal is an agreement that will be paid off without default, because a default kicks the case back into active collection.

California penalties and interest are addressed separately. Some are abated as part of resolution. Some are paid as part of the state settlement. The state is generally more flexible than the federal government on payment plans, especially if the federal return compliance issues are being addressed at the same time.

Option 3: Currently Not Collectible Status While Pursuing Penalty Abatement

Some cases involve liabilities that are real but for which payment is genuinely not possible. Business owners who closed the business, took a loss, and have no other income sometimes fall into this category. In those situations, Mike files for Currently Not Collectible (CNC) status with the IRS.

CNC status pauses collection action. The IRS stops pursuing levies and garnishments. The account gets placed in non-collectible status for a period (usually two years, then reviewed). During that time, penalties and interest continue to accrue, but collection enforcement is not active.

This buys time to pursue penalty abatement on the original penalties (the $255-per-owner amounts), to build reasonable cause documentation, or to recover financially. After two years, if the owner’s situation has improved, the account gets reviewed and collection action can resume. If nothing has changed, CNC can be extended.

CNC is not forgiveness and not a long-term solution, but it is sometimes the right tool for the moment.

Option 4: Offer in Compromise (Rare, but Available)

An Offer in Compromise allows a taxpayer to settle a tax debt for less than the full amount owed. OICs are difficult to obtain and rare in formed entity cases, because most formed entities have no income or low income, which means they should have small liabilities once calculated correctly.

But where an SFR has inflated a liability significantly, and the owner genuinely cannot pay even the true amount, an OIC can sometimes work. Mike evaluates OIC eligibility using the IRS criteria (doubt as to liability, doubt as to collectibility, or effective tax administration), and if one is viable, he files it.

The OIC application fee is $205. The application itself requires specific forms and documentation. Most OICs take nine to twelve months to be processed. But when an OIC is approved, it settles the debt at a fraction of the assessed amount.

What Gets Better When the Case Is Handled Now, Not Later

Penalties Are Lower When Relief Is Requested Early

A formed entity with six years of unfiled returns filed today with reasonable cause documentation attached to the returns has a reasonable chance of penalty relief. The same entity, with six years of unfiled returns, filed after a revenue officer has been assigned and collection action has been ongoing, almost certainly does not.

The difference is not just the mental distance between “proactive” and “reactive.” It is a structural rule: reasonable cause must be evaluated based on the facts at the time the failure occurred. The further away you are from the original year, and the more time has passed since you had the opportunity to fix it, the weaker the reasonable cause argument becomes.

Bank Accounts Stay Unfrozen

A California Franchise Tax Board levy on a business bank account is immediate and complete. The freeze happens before the business owner even knows a levy is coming. Processing takes weeks. The funds are held for months. By the time they are released, the business is often damaged beyond repair.

Once a levy has been issued, getting it released requires paying the liability, posting a bond, or getting a Collection Due Process hearing and winning it. All of these are slower and more expensive than preventing the levy by bringing the account current.

The Owners Keep Limited Liability Protection

A formed entity exists partly because the owners want liability protection—creditors of the business cannot come after personal assets. But that protection erodes when the entity has not been properly maintained.

If the IRS or the Franchise Tax Board determines that the owners have ignored the entity deliberately or fraudulently, or if collection action reaches a certain point, the agencies can pierce the corporate veil and go after owner assets directly. This is rare, but it happens. Getting the entity current and properly maintained preserves the limited liability protection.

How to Start: The First Conversation

The process starts with a single phone call or email. You describe the situation: when the entity was formed, what has happened (or not happened) since, whether any notices have been received, whether anyone has already been contacted by the IRS or the Franchise Tax Board.

Mike will then pull preliminary transcripts—usually within 3–5 business days—to see exactly what the IRS and California have on file. Those transcripts answer the main questions: how many years actually have to be addressed, whether an SFR has been prepared, whether collection action is underway, and what the rough exposure is.

From there, Mike quotes a flat fee for the work: pulling complete records, preparing all required returns, coordinating with federal and state, making penalty relief requests, negotiating any payment arrangements, and handling the dissolution if that is needed.

The engagement is straightforward. Returns get prepared. Information gets organized and submitted. Mike communicates with the IRS and California on the owner’s behalf. The case moves toward resolution.

The key is starting the process before enforcement action intensifies. A case that is six months into default is more expensive to fix than a case that is dealt with at year one or year two. The longer you wait, the more penalties accrue, the more interest compounds, and the harder it gets to argue reasonable cause.

About Mike Habib, EA

Mike Habib is a federally licensed Enrolled Agent, which means he holds unlimited practice rights before the IRS in all matters. He can represent taxpayers in audits, appeals, collections, and all other IRS functions. He operates Mike Habib, EA, a tax representation and business financial advisory practice based in Whittier, in Los Angeles County, California, serving clients nationwide and Americans living abroad.

Before building the representation practice, Mike worked in corporate finance, including service as a Controller at Xerox Corporation and Director of Finance at AEG. That background shapes how he approaches these cases: he reads financial statements, reconstructs business books, understands the difference between what happened and what the records show, and can explain all of it credibly to the IRS or the Franchise Tax Board.

He has more than 20 years of experience in tax representation. The practice holds professional memberships in the National Association of Enrolled Agents, the California Society of Enrolled Agents, and the National Association of Tax Professionals. Mike Habib, EA is a BBB A+ Accredited Business.

Most importantly: every case is handled personally by Mike. There is no intake department, no junior staff the file gets handed to, and no one between you and the person who will actually argue your case. Cases range from small local matters to liabilities in the tens of millions.

Ready to Stop the Penalties From Compounding?

If you incorporated or formed an LLC and have not filed tax returns for the entity, the time to act is now. Every year that passes adds another $800 in California franchise tax, another year of federal §6698 penalties, and another year of interest.

Call Mike Habib, EA at 562-204-6700 or 1-877-788-2937. Or ONLINE to set up an initial consultation.

The first step—pulling transcripts to see exactly what you are facing—takes a few days and clarifies the entire picture. After that, a flat fee for resolution removes the guesswork about cost.

The problem will not get better on its own. But it can be solved. Let us show you how.