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Updated Mar 14, 2024

What to Do if You’re Behind on Your Taxes

Learn how to remedy your tax situation as quickly and effectively as possible.

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Jennifer Dublino, Senior Writer & Expert on Business Operations
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Table of Contents

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Tax season is a nearly universal source of stress for business owners. It’s especially fraught with anxiety if you have unpaid taxes. The longer your tax delinquency goes on, the more daunting the prospect of catching up becomes, especially as interest and penalties accumulate. You may feel your only option is hiding from the IRS since any form of contact would constitute an admission of guilt or remind the IRS to audit your business

However, it’s in your best interest to remedy the situation as soon as possible, and you may be surprised to learn the process isn’t as difficult as you’d guess. You may not even be in that much trouble (and if you are, it’s crucial to address that). Learn the steps to take if you’re past due ― and the potential impact on your business.

Editor’s note: Looking for tax debt relief for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

Steps to take if you’re behind on your taxes

If you’re behind on your business taxes or payroll taxes, you must take immediate action to minimize the financial impact on your business. Follow these steps to get started.

1. Communicate with the IRS.

While it may seem like a faceless monolith, the IRS is comprised of people trying to do their jobs who face considerable resistance daily. You may feel you’re at their mercy, but they face their own obstacles as they attempt to collect unpaid taxes. With that in mind, IRS officials appreciate it when business owners are cooperative and communicative and will often respond in kind.

Usually, IRS notices are rife with frightening numbers and threats of additional fines. If you already had trouble paying the original owed amount, it’s understandable to feel overwhelmed when presented with mounting costs. However, the amount billed doesn’t necessarily reflect what you ultimately must pay. When you demonstrate a willingness to work with the IRS, you’re already on the path to reducing what you owe. You may even be able to negotiate your debt down to the original owed amount.

Respond to any requests for information from IRS agents ― especially if you’ve been ignoring them before this ― and be transparent about your situation. You may not want to acknowledge openly that you owe the agency money, but it is well aware of what you owe. IRS agents investigate when necessary ― when they need further information and you don’t provide it. If an investigation is the only way they can contact you successfully, they won’t look upon you very favorably.

FYIDid you know
All the best accounting software platforms can help you stay on top of your company's finances year-round. Consistent accounting will lead to fewer headaches during tax season.

2. Investigate available options to pay your tax bill.

Paying down your tax bill is your goal, so evaluating your options is crucial. Consider the following:

  • Take a loan to pay your tax bill: To avoid IRS interest and penalties, which can add up, consider applying for a business loan or personal loan to cover your tax bill. Getting a loan instead of signing up for the IRS’s installment payment plan (more on this option below) can give you more flexibility, especially if you don’t meet the agency’s installment plan qualifications. Of course, you’ll need to pay interest on your loan at whatever rate you qualify for when you apply. 
  • Pay your tax bill with a credit card: Consider using your business credit card to pay your taxes. If you have a card that gives you cash back or other rewards, paying a significant sum can bring you some benefits ― if you’re confident you can pay off the balance within a reasonable time frame. However, use this option judiciously because credit card interest typically is much higher than on a bank loan, and you don’t want to burden your company with excessive accumulated debt.
  • Borrow from your 401(k) to pay your tax bill: Some 401(k) retirement accounts allow you to take loans out against up to 50 percent of the account balance. There will also be a maximum amount you can borrow, $50,000, and you’ll be required to repay the loan within five years or face hefty penalties and tax consequences. If you are younger than age 59 1/2, you must pay a 10 percent early distribution penalty, and the amount you borrow will be treated as taxable income. The retirement plan will charge you interest on the amount borrowed, and there may be a processing fee for the loan.
  • Ask for a short-term extension: The IRS is in the business of collecting money, not being punitive. Accordingly, it provides options to make payment feasible for people and businesses in difficult situations. Extensions are one such option. Consider asking for a short-term extension if you anticipate getting the money to pay your taxes soon. A short-term extension will give you up to 120 days (roughly four months) to collect money to pay your tax bill. However, even if you’re granted this option, you’ll accrue interest until you pay your bill in full. Still, extra time will relieve some of the stress of being on the wrong side of the IRS. Interest will be the short-term federal rate plus 3 percent and may fluctuate quarterly. Additionally, there will be a penalty of 0.5 percent per month on the unpaid balance. 
  • Set up a payment plan for your tax bill: If you know you won’t be able to pay your bill within six months, consider seeking an installment agreement ― an IRS-approved payment plan. You won’t incur additional penalties if you make those payments on time. (However, an installment agreement has processing fees and still carries interest.) You can choose a short-term payment plan, which is 180 days or less, or a long-term plan. For the short-term payment plan, you must owe less than $100,000, including taxes, penalties and interest. For a long-term plan, you must owe $50,000 or less and have all required tax returns filed. Visit the IRS online payment agreement web page to investigate this option.
  • Explore an offer in compromise to handle your tax bill: If an installment agreement isn’t feasible, and you can demonstrate that paying the amount you owe would legitimately endanger your business, you may qualify for an offer in compromise ― an agreement to settle your debt for less than the owed amount. Visit the IRS’s offer in compromise web page to explore this option.
  • Explore currently not collectible (CNC) status to deal with your tax bill: Consider demonstrating that you are in CNC status. With this option, you must prove that you have no money now and are not expecting money in the near future to pay your taxes. If the IRS approves this option, it will delay tax collection until it determines that you can afford it. The agency will review your finances every year to monitor your progress. If you owe more than $10,000, the IRS will likely file a tax lien on you as a matter of public record. Any future tax refunds will apply to your back taxes. Visit the IRS’s information about CNC status online to learn more.

3. Make a plan to address your tax bill.

After weighing all your options, it’s time to choose a plan to address your tax bill. It’s best to communicate immediately with the IRS and pay what you can. Interest and penalties are calculated based on the remaining unpaid tax amount, so you can reduce the total amount you pay meaningfully, even if you seem to be only chipping away at it.

TipBottom line
When deciding which option to pursue to handle your tax bill, determine what's currently doable in your business's circumstances, considering your income, assets and current business debt level.

4. Consult a tax professional to avoid a repeat situation.

Business owners tend to fall behind on taxes for a simple reason: They think they can’t afford to pay the amount they owe. If taxes are yet another unmanageable business expense, you have more significant issues that must be addressed to improve your business’s cash flow

Thankfully, there’s a good chance that working out a resolution with the IRS won’t affect your day-to-day operations dramatically. To stay on the right side of the agency in the future, consider hiring an accountant or looking into tax consultants. While consulting professionals will incur costs, this investment will be well worth it if your business taxes get and stay in order. Financial professionals like certified public accountants will alleviate your anxiety and can even make tax time feel routine ― not a time for dread. 

What it means to be past due on your taxes

Being past due on your taxes means you owe the IRS an unpaid balance, called the principal. Late fees and interest will be added to the principal, accruing until you pay off the total balance. This is why you want to address past-due balances as soon as possible ― they only get worse as time goes on.

Remember that filing an extension doesn’t extend the time you have to pay the balance on your taxes. The amount will accrue penalties and interest as of the original tax filing deadline.

Did You Know?Did you know
Paying your estimated business taxes throughout the year reduces the pressure to write a very large check come tax season. Ask your tax professional to help you establish a year-round estimated tax plan for the future.

How filing taxes late can impact your business

Tax delinquency may have costly and altogether unpleasant consequences, but these consequences only become worse with neglect. Not filing your taxes on time triggers the IRS collection process and can result in penalties, which may include the following:

  • Levies: When there are levies against your business, the IRS can seize some of your company property.
  • Liens: When the IRS files a lien, it has an ownership claim on your company’s assets until you pay off your debt. 
  • Inability to borrow: Liens and levies show up on your credit report, hurting your company’s ability to borrow or finance purchases.
  • Fees: You may incur fees, including penalties, interest and surcharges, for each month the taxes go unpaid, further hurting your finances.

FAQs about past-due taxes

Not filing a return means you won't receive any refund due. Let's say you haven't filed taxes for the past two years. For the first year you didn't file, you should have gotten a refund; in the second year, you owed taxes. When you file both years' returns, you can claim year one's refund and use it to offset the taxes owed in year two. However, refunds are only good for the past three years, after which they expire.
When you fail to file a return, the IRS files a substitute return for you. This return may not take into account all the deductions and exemptions you'd claim if you filed your own return. You can file your return within 90 days or dispute the IRS's substitute return in tax court. Once the IRS files a substitute return, it will begin the collection process to collect the tax amount it says you owe; interest and penalties will begin accruing at this point. Take action as soon as possible to minimize the damage.
If this is the first time you've gotten in trouble with the IRS, you can request a first-time abatement to get out of failure-to-file and failure-to-pay penalties. You can also present reasonable cause arguments to plausibly explain why you didn't file or pay in the past. In the future, file and pay on time.
If you continue not filing or you fail to pay your taxes, the IRS can arrest and prosecute you for tax evasion, which entails jail time.
The IRS will, of course, charge you the amount it says you owe on your taxes. It will also almost always charge a failure-to-file penalty of 5 percent of the unpaid tax balance per month plus an underpayment penalty of 0.5 percent of the unpaid tax balance per month. These penalties are capped once they reach 25 percent of the original amount due.
author image
Jennifer Dublino, Senior Writer & Expert on Business Operations
Jennifer Dublino is an experienced entrepreneur and astute marketing strategist. With over three decades of industry experience, she has been a guiding force for many businesses, offering invaluable expertise in market research, strategic planning, budget allocation, lead generation and beyond. Earlier in her career, Dublino established, nurtured and successfully sold her own marketing firm. Dublino, who has a bachelor's degree in business administration and an MBA in marketing and finance, also served as the chief operating officer of the Scent Marketing Institute, showcasing her ability to navigate diverse sectors within the marketing landscape. Over the years, Dublino has amassed a comprehensive understanding of business operations across a wide array of areas, ranging from credit card processing to compensation management. Her insights and expertise have earned her recognition, with her contributions quoted in reputable publications such as Reuters, Adweek, AdAge and others.
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