Fledgling entrepreneurs usually focus on the bright side of their small business plans, not contemplating what to do if revenue nosedived and business taxes couldn’t be paid. Yet tax problems are common and knowing how to face them is crucial to the survival of your business.
If your cash flow is suffering and you don’t have the money to pay the Internal Revenue Service, don’t panic. Though the IRS has the power to get tough on scofflaws, it usually moves slowly, giving you time to remediate before the agency swoops down with talons exposed.
Anyone earning enough money is obliged to pay taxes and file returns. Even if you’re having trouble pulling together what you owe, you still must file your business returns on time or request extensions. Tax collectors have little patience with those who dodge them, so timely filing is a must. If you can’t pay what you owe, you need to let the tax collectors know why.
But what if you already messed up? You should immediately take steps to correct your problem. If you haven’t filed returns on time, do it now. If you need help preparing the returns, get it. And if you owe money, consider asking the IRS for an agreement that will give you 60 to 120 days to pay you account in full.
You should never ignore the IRS if you receive a demand letter. Federal tax collectors have a toolbox of techniques to extract money from you, including filing liens and seizing your business, your home, your bank accounts and your wages. You can even go to jail for not filing your taxes. It doesn’t even need a court order to do those things. It’s important to understand the huge disadvantage you face if you try to avoid paying your taxes.
Compounding Interest and Other Consequences
Even if you cooperate, the IRS will still demand what you owe with interest, which compounds at a rate of as much as 14%. There are other reasons not to delay in confronting your debt. If you’re self-employed, your earnings won’t be reported to Social Security until you pay your taxes, and that can curtail your benefits in retirement. The IRS will also compute your taxes if you haven’t, and its assessment almost certainly will be higher than what your own tax preparer would calculate, since the IRS isn’t looking for deductions. The government will also withhold any tax refund your business is due until your back taxes are paid with interest.
There are also secondary issues. If you owe the government money, it can have a negative impact on your credit score, making it hard to get business loans and other sorts of financing.
Most new businesses fail within five years, so cash flow problems are very common. But before holding back tax payments to buy time, consider the consequences. Do you want to face a loss of personal property, your savings and your future wages by shorting the IRS? Tax payments should always be a top priority.
Undoubtedly, if you’re a business owner or sole proprietor and have tax debt, you’re worried. As a first step, see a tax preparer to evaluate your options. If the IRS has already contacted you, contacting a tax attorney would also be advisable.
Time is generally on your side during a tax problem. The IRS’ budget and staff have decreased in recent years, which means it has fewer auditors and collectors to work on your case. But its computer programs continue to improve, so while it might take months or years for you to have a human on your case, a computer algorithm might generate liens and levies even before you get a call from an agent.
If the IRS calls you, be cooperative but don’t divulge more than you’re asked. You don’t need to tell you life’s financial story or discuss your investments unless you receive a summons.
Prepare to Meet the IRS
Even before you talk an IRS agent, you should prepare your case. Know what the IRS will want from you and have your answers ready in advance. Here are some preliminary steps:
- Make sure you are in filing and payment compliance. Call the IRS to confirm that all your required business tax returns are on file. Make sure you’ve paid enough to cover the current year’s taxes, since the IRS will require that all required deposits are up to date.
- Examine business tax returns for the year or years that you didn’t fully pay taxes to confirm your underpayments. If you find errors, file amended returns. Also, review any penalties you might have incurred and ask your tax preparer if they can be reduced or eliminated through a penalty abatement.
- Know what you’re up against. What penalties for non-payment do you face? Is a tax lien likely if you don’t pay or reach a settlement with the IRS? How much interest must you potentially pay on your unpaid balance?
- Consider alternatives to pay what you determine you owe. You might consider using a credit card if you have one that’s available but beware the cost and risks of not paying the credit card balance. Paying with a credit card merely shifts your debt to another creditor, and interest due on unpaid credit card balances can be substantial.
Tax Debt Relief Programs
- Mull a tax debt relief strategy for approaching the IRS.
- Request an Extension: You could request an extension, which will buy extra months before you file you next tax return.
- Installment Plan: You can propose an installment repayment agreement. If you can convince the IRS that you don’t have funds available to pay your taxes but could make the payments over time, you can ask for a monthly installment payment plan.
- Temporary Delay: You can ask for a temporary delay in payment if you can show that your debt isn’t collectible at present but likely will be in the future.
- Offer in Compromise. The IRS will sometimes forgive a portion of unpaid taxes if you can show you simply can’t pay what you owe but could afford a lesser amount. It might forgive penalties, but it is not allowed to waive interest that accrued on unpaid taxes.
When you’ve done your research, analyze the alternatives (probably with a tax preparer or attorney) and decided on a strategy, you’re ready to approach the IRS. When you attend a scheduled appointment, bring all relevant documents. These include:
- All notices you’ve received from the IRS regarding your unpaid taxes.
- In cases where you project that won’t be able to pay what you owe over six years, bring your business records, bank statements, loan information, balance sheets and any other documents you might have to buttress your case for a hardship exemption and possible tax bill reduction.
- Complete an IRS Form 433-B, Collection Information for Businesses. You should prepare this in advance of your appointment.
- Copies of all tax returns for the years that you didn’t pay all taxes due.
Meeting with the IRS requires careful preparation. Make sure you have copies of all relevant documents, including tax returns, receipts for expenses, loan statements and payroll information.
For your best chance at IRS debt relief, make, you will have to explain your payment shortfall. A tax advisor might be the best person to tell you what the IRS agent will ask and help you be ready to provide solid answers.
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
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- Daly, F. (ND) How to Deal with the IRS If Your Small Business Has Tax Debt. Retrieved from: https://www.nolo.com/legal-encyclopedia/small-business-tax-debts-irs-32280.html
- NA, (2018, January 20) Your Business Owes Back Taxes; Now What? Retrieved from: https://www.score.org/blog/your-business-owes-back-taxes-now-what
- NA, ND. What to Do If You Can’t Pay Your Business Taxes. Retrieved from: https://www.hrblock.com/tax-center/irs/audits-and-tax-notices/cant-pay-business-taxes/