Small businesses that owe back taxes have the unenviable task of facing the most formidable debt collection machine, the IRS. The IRS, or the Internal Revenue Service, has debt collecting powers like no other creditor. It can auction property, levy bank accounts, place a lien on all your small business’ property, and liquidate its assets without having to put a foot in a courthouse. So, it’s important to know how to deal with the IRS on back taxes.
Half the federal tax liens filed are performed automatically by IRS computers without a single IRS agent’s involvement. Fortunately, most small business owners can apply for tax relief and work out something the IRS and their businesses can live with.
If your small business is in trouble with the IRS, consider the following tax relief options.
Don’t ignore the IRS
The IRS may take its sweet time to take notice of your delinquent taxes or dubious business expense claims, but it will eventually catch up with you. Even if you can’t afford to pay your back taxes, stay in touch, and reply to all correspondence. Be very careful about the financial information you provide the IRS. Anything you say or send can be used against you in an audit. Always pass 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.
Don’t forget interest and penalties
Unpaid taxes are only half the problem when it comes to tax debt. The moment you’re late filing or paying 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. The IRS’s Fresh Start Program offers taxpayers new methods for reducing or even removing tax penalties.
Always file your small business’ tax return
This is probably the best tax advice you will ever hear. Everybody knows that Al Capone was imprisoned for tax evasion, not for murder, racketeering, or bootlegging. But did you know what the tax evasion charge was? Al Capone was convicted of failing to file tax returns on the income he earned from his illegal business activities. You see, not paying your business’ taxes is not a crime. The worst that can happen is you’re forced to sell your business. Failing to file your tax returns, on the other hand, is a crime that could land you in a cell.
If avoiding imprisonment isn’t enough of an incentive, consider the financial cost. The penalty for not filing a tax return is ten times higher than the fine for late payment. Yes. The new payment penalty is 0.5%, but the penalty for not filing a tax return is 5% of the tax debt balance.
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. In 2015, the IRS had 15.6% fewer workers than in 2010, but it had to process 12.8 million more tax returns. Budget cuts forced the IRS to perform 10,577 fewer tax audits in 2015 than in 2014. Yes. The IRS is short-staffed would be willing to negotiate with businesses that are making strides to stay current with their taxes. Among other things, you can ask for a payment plan, get an offer in compromise, or request penalty relief. Ask your tax relief representative which tax relief method is best for your small business.
Consider an offer in compromise
An offer in compromise is an agreement between the IRS and a taxpayer that settles the tax debt for less than the full amount owed. Not all businesses with substantial tax debts are eligible. If a company can afford to pay its tax debt in full or through a payment plan, it will most likely not qualify for an offer in compromise. About 25% of businesses that have tax debt qualify to make a deal with the IRS and settle their debt for a fraction of the total amount. pennies on the dollar. You can increase your chances of negotiating successfully with the IRS by hiring a tax relief company that has tax attorneys and CPAs on their staff.
If you owe a lot of money to the IRS, it can also help to have a tax relief company on your side. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee and charge competitive rates. Check out which tax relief company is the best fit for you.
Request “Currently Not Collectible” status for your small business
If your business is in serious difficulties, you can also request the IRS to classify your business as Currently Not Collectible, CNC temporarily. If the IRS approves your request, it will pause its collection efforts against your business. The penalties and interest on the tax balance will continue to accumulate. However, it will give you time to get your financial affairs in order or consider other tax relief programs.
Bankruptcy is always an option
Although filing bankruptcy is not to be taken lightly, it can reduce or altogether remove some tax debts. The rules are complex, and the consequences to your business’ credit will be hurtful for small business, but bankruptcy is worth considering as a last resort.
How to deal with IRS on back taxes | Small business tax representation
Always consult with a tax attorney before considering tax relief, particularly when contemplating bankruptcy. Hire an experienced tax professional that is licensed to act as a tax representative before the IRS. There is a reason hiring a tax representative is right all taxpayers have under tax law. Find out here if you qualify and what tax relief options your business qualifies for. You will also receive a complimentary consultation with a senior tax professional.
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.