If not managed correctly, back taxes can spell the end for a business. The good news is that most small businesses with back taxes can work things out with the IRS if they understand how the tax collection process works and are ready to negotiate. If your business owes money to the IRS money, consider these steps.
If you own a small business that owes back taxes, you have the unenviable task of facing the most formidable debt collection machine, the Internal Revenue Service. The IRS has debt collecting powers like no other creditor. It can:
- auction property
- levy bank accounts
- place a tax lien on all your small business property
- liquidate your business assets without having to step foot in a courthouse
So, business owners need to know how to deal with the Internal Revenue Service on back taxes. If your small business is in trouble with the IRS because of unpaid tax obligations, consider the following tips and tax relief options. Taking one or more of the following steps could turn your situation around.
Don’t ignore the IRS
The IRS may take its sweet time to notice your delinquent business taxes or dubious business expense claims, but it often catches up with you in the end. Even if you can’t afford to pay your back taxes, stay in touch and reply to all correspondence sent to your business. Take notes and document the details of every conversation you have.
Be very careful about the types of financial information you provide to the IRS. Remember that anything you say or any documents you share can be used against you in an audit. If in doubt, consult with a tax professional about the best strategy for your business. Here is a list of tax relief companies that work with small businesses and have tax attorneys and enrolled agents on staff.
Key points to remember: Small business back taxes
- Don’t ignore the IRS.
- Remember interest and penalties.
- File your small business tax returns (even if you can’t afford to pay them).
- Pay your quarterly estimated taxes.
- The IRS is ready to negotiate.
- Consider an offer-in-compromise.
- “Currently Not Collectible” status for your small business.
- Consider bankruptcy as a last resort.
- Consult a professional when dealing with back taxes
Remember interest and penalties
Unpaid tax obligations are only half the problem when it comes to tax debt. The moment you’re late filing or paying business taxes, penalties and interest start to accrue. IRS interest and penalties add up quickly. In some cases, they can represent over 40% of your small business tax debt. Due to the penalties and interest, it is in your best interest to stay in close communication with the IRS about your case. The IRS’s Fresh Start Program offers taxpayers new methods for reducing or even removing tax penalties.
Always file your small business tax returns
According to the IRS, the penalty for not filing your tax return is normally 5 percent of the unpaid taxes for each month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.
- If you do not file your tax returns, you may spend up to one year in prison or pay fines of up to $100,000. Businesses may pay fines of up to $200,000. Also, you must pay all of the taxes you owe.
- Some business owners may not be aware that they need to file or are not very concerned about filing their tax returns. They are sure they have overpaid and are expecting a tax refund. However, the IRS won’t let you claim a refund indefinitely. Generally speaking, after three years, the IRS will consider your overpaid taxes a “contribution” to the United States Treasury and refuse to issue the refund.
- Remember that you have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirements listed in the Form 1040 and 1040-SR instructions. For instance, you should probably file if you are eligible for credits such as the earned income credit, the additional child tax credit, or the health coverage tax credit.
Pay your small businesses estimated taxes
Federal income taxes are pay-as-you-go taxes. You must make tax payments as you and your family earn or receive income during the year. The IRS accepts two methods to pay as you go: withholding and estimated taxes.
If you have a salary and a small business, you may not have to pay estimated taxes. If you get income from other sources, such as interest, dividends, alimony, self-employment income, capital gains, prizes, and awards, you may also need to make estimated tax payments. Small business owners typically need to make estimated tax payments every quarter through the IRS website.
Remember that the IRS is willing to negotiate
The IRS may be the most significant federal bureaucracy in the United States, but it’s still underfunded and overworked.
- Between 2010 and 2019, the IRS cut over 21,000 full-time equivalent positions (source). As a result, the short-staffed IRS is often willing to negotiate with businesses that are making strides to stay current with their taxes.
- Through the Fresh Start Initiative, a collection of programs for taxpayers looking to pay off their tax debt, you may have more options than you think.
- Among other things, you can ask for a payment plan, which is an agreement with the IRS to pay the taxes you owe within an extended timeframe. You can also consider other types of help: an installment agreement, an offer in compromise, or penalty relief.
- Ask your tax professional or relief representative which tax relief method or payment plan option is best for your small business.
Consider an offer in compromise
An offer in compromise (OIC) is an agreement between the IRS and a taxpayer that settles your business tax debt for less than the full amount owed if your taxes are past due. Not all businesses with substantial tax debts are eligible. If an organization can afford to pay its past due tax debt in full or through a payment plan, it will most likely not qualify for an offer in compromise. About 25% of businesses with unpaid taxes qualify to make a deal with the IRS and settle their debt for a fraction of the total amount. Read this detailed guide for more information on filing an offer in compromise and calculating the minimum offer the IRS will consider.
You can increase your chances of negotiating successfully with the IRS by hiring a tax relief organization with tax attorneys and CPAs on their staff. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee, give accurate information, and charge competitive rates. Check out which tax relief company is the best fit for you.
“Currently Not Collectible” status for your small business
If your business has more serious difficulties, you can temporarily request that the IRS classify your business as Currently Not Collectible (CNC). If the IRS approves your request, it will pause its collection efforts against your business. The penalties and interest on the taxes will continue to accumulate. However, it will give you and your employees time to get your financial affairs in order, make arrangements for a payment plan, or consider other tax relief programs.
Consider bankruptcy as a last resort
Although filing bankruptcy is not to be taken lightly, it can reduce or remove some tax debts. The rules are complex, and the consequences to your business’ credit will be hurtful for small businesses, but bankruptcy is worth considering as a last resort.
Review the impact on your Social Security benefits
If you are a self-employed business owner and do not complete your federal income tax filings, any self-employment income you earned will not be reported to the Social Security Administration, and you will not receive credits toward Social Security and Medicare benefits.
Remember that the IRS will act if you don’t
If you fail to file tax returns, the IRS may file a substitute return for you. Likely, this return won’t give you credit for tax deductions and exemptions that you may be due. If this occurs, the IRS will send a Notice of Deficiency CP3219N (90-day letter) proposing a tax assessment. You will have 90 days to file your past-due tax return or file a petition in Tax Court. If you do neither, the IRS will proceed with their proposed assessment. If you have received notice CP3219N you can not request an extension to file.
Their substitute return will lead to a tax bill, which, if unpaid, will trigger the collection process. This can include such actions as a levy on your wages or bank account or the filing of a notice of federal tax lien. If you repeatedly do not file business tax returns or owe back taxes, you could be subject to additional enforcement measures by the IRS, such as additional penalties and criminal prosecution.
Consult a professional when dealing with back taxes
Always run the financial information you send to the IRS by a tax professional first. True, tax attorneys and CPAs are not cheap, but they are less expensive than facing an audit or tax evasion charges and are often tax-deductible for your business. Hire an experienced tax professional that is licensed to act as a tax representative before the IRS, not just someone who can complete tax returns, particularly when contemplating bankruptcy.
If you’re unsure who to call and what questions to ask, consider hiring a tax relief firm that employs enrolled agents (EA), a person who is trained in federal tax matters and is licensed by the IRS, or tax attorneys. The IRS grants EAs the right to represent any client—individual or business—on any tax matter before any IRS office. Here is our list of the best tax relief companies.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.