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Updated October 07, 2023 Reviewed by Reviewed by Lea D. UraduLea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.
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A clearance certificate is a certificate that verifies an entity has paid all its tax liabilities at the time the entity ceased to exist or transferred to a new owner. It also applies to the tax liabilities of a deceased individual when managing their estate upon death. A clearance certificate is not required in all jurisdictions and is most common in Canada, the U.K., and Ireland. In the United States, clearance certificates are more commonly issued by state revenue agencies.
There are many different situations in which a clearance certificate may apply. A business may be required to obtain an income tax clearance certificate when it decides to dissolve. An estate whose assets have a high value may be required to obtain an estate tax clearance certificate when the estate owner dies and the estate's assets are distributed to heirs.
A sales tax clearance certificate allows someone purchasing an existing business to ensure that they will not be responsible for any unpaid sales taxes upon becoming the business's new owner. The validity of a clearance certificate may only last for a certain period of time. For example, clearance certificates in Australia are valid for 12 months from the date they are issued.
Countries such as Canada, Australia, and Ireland use clearance certificates for such transactions as the purchase of real property or resolving estate assets after the death of the owner.
Ireland requires tax clearance certificates when businesses apply for or seek to renew a number of different licenses. Gaming licenses, liquor licenses, and moneylender licenses all require such certification in Ireland. Individuals who wish to hold certain public offices in Ireland must also obtain tax clearance certificates. This includes senior public officials and candidates for appointment to the judiciary.
In the United States, local governments can require clearance certificates for other reasons. For example, New Jersey requires businesses to obtain a tax clearance certificate in order to receive state grants, rebates, and other incentives. The certificate may be requested when business assistance or tax incentives are sought from such state agencies as the Economic Development Authority, the New Jersey Casino Reinvestment Development Authority, and the Department of Community Affairs.
The Internal Revenue Service (IRS) provides a tax clearance certificate for residents and nonresidents leaving the United States. This is known as alien tax clearance. The purpose of this document is to show that you have complied with all U.S. tax law before you are allowed to leave. The document you will need is known as a departure permit or sailing permit.
Most commonly, states issue clearance certificates, demonstrating that an individual is compliant with all taxes and other obligations as of the date of the certificate. Those seeking clearance certificates will have to request them from state authorities, usually the state's Department of Revenue.
There are many reasons that can arise where one would need a clearance certificate. One of the most important is that a clearance certificate will allow you to distribute assets without having to worry about paying unpaid taxes from either a personal or business level.
Yes, the IRS issues a tax clearance certificate, known as a departure permit or sailing permit, for residents and nonresidents leaving the country to prove that they have complied with all U.S. tax law. There are exemptions to who needs to obtain a departure permit.
Clearance certificates demonstrate that a business or person is currently compliant with all tax liabilities and does not owe any outstanding tax. Clearance certificates are required in many situations, such as in estate planning or the closing or transfer of a business. They ensure that legally, all taxes have been paid.