If you missed a tax deadline or simply couldn’t afford your small business tax bill and got behind, you could face penalties and other issues. This article provides vital information to help you get your financials back on track.
What can happen to your small business if you owe back taxes?
Depending on your business type, any small business taxes you owe are due by the standard tax deadlines of either March 15 or April 15 each year. Failure to pay your tax liability by the appropriate deadline results in owing back taxes.
Many issues can arise if you fail to pay. Here are five of the most common consequences:
1. Penalties and Interest Rack Up
The longer you owe back taxes, the greater the tax debt will become. The IRS compounds most tax debts at 14% interest, so the fees add up fast! There are penalties for late filing and additional penalty fees for late payment. Those fees can be as much as 25% of your debt.
2. Levies, Seizures, and Liens, Oh my!
The Federal Payment Levy Program (FPLP), started in 2000, gives the IRS the right to collect back taxes from a variety of sources such as federal employee retirement annuities, federal payments such as defense contracts, federal employee travel advances or reimbursements, certain social security benefits, some federal salaries, and more. The IRS can also seize property, equipment, and cars or levy business assets. The federal government could also place a lien against your business. If you attempt to sell assets, the IRS can collect those funds before they get to you.
If you do not pay your tax notice within 10 days of receiving it from the IRS, they can place a lien against your business or personal property (if you are an unincorporated business).
4. Revoked Passport
Seriously delinquent tax debt is certified to the State Department by the IRS. The IRS considers “seriously delinquent” tax debt as unpaid legally enforceable debt totaling more than $55,000, including penalties and fees after filing a lien. All administrative remedies under that law are exhausted, and a levy has been issued.
5. Jail Time
In extreme situations, criminal action could ensue if the IRS determines that your business purposely avoided filing or paying taxes. Willful failure to pay taxes is considered tax evasion or fraud. It is a felony punishable by a $10,000 fine, up to five years in prison, or both.
What to Do if Your Business Owes Back Taxes
Suppose your business is behind on paying back taxes. In that case, you must take immediate action to attempt to mitigate the damages. Here are our top tips for what to do when you owe back taxes:
1. File an extension
If you need more time, have your tax preparer file for an extension. That will allow you to file later in the year instead of in the spring. While this will not reduce the amount you owe or stop the compounded interest and hefty penalties from accruing, it will give you more time to prepare and meet the deadline.
2. Payment Plan
If you know you cannot pay your tax debt in full immediately, set up a short- or long-term payment plan with the IRS. Some businesses can set up a payment plan online.
3. Offer in Compromise
An offer in compromise is a negotiation with the IRS where the agency settles your tax debt for less than what you owe. For consideration, taxpayers must present a valid offer based on their ability to pay.
4. Request Currently Not Collectible Status
Suppose the taxes you owe cause significant hardship. In that case, the IRS may grant a temporary hold on your account and place it in “currently not collectible” status. While the tax is still owed and penalties and interest continue to pile up, collection efforts from the IRS are temporarily suspended. Your tax situation will be reviewed annually, and the IRS will determine when you can pay.
5. Contact a Professional
The best defense when dealing with the IRS is to have a qualified CPA or accountant on your side. These professionals can deal directly with the IRS on your behalf, which is a huge bonus since they are up to date on tax laws and regulations regarding back taxes. It can be money well spent to relieve the anxiety and stress that accompanies paying back taxes.
And, of course, you want to be sure to respond to all IRS notices. Communication is essential when dealing with a back tax situation. As soon as you receive any notifications, turn them over to your tax professional and let them advise you on how to proceed. Even when you can’t pay, it is critical to communicate that so that the IRS knows you are willing and making an honest attempt to remedy your tax situation to get back in good standing.