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. [Follow these tips to avoid a tax audit.]
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.
Steps to take if you’re behind on your taxes
If you’re behind on your taxes, you must take immediate action to minimize the financial effects on your business. Follow these steps to get started.
1. Communicate with the IRS.
While it may seem like a faceless monolith, the IRS comprises people who are just trying to do their jobs and face considerable resistance in doing so. 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 when business owners are cooperative and communicative, and will often respond in kind.
IRS notices are usually 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’ll ultimately have to 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 them money, but they’re already aware of that. IRS agents investigate when it becomes necessary – i.e., when they need further information and you don’t provide it. And if an investigation is the only way they can make successful contact with you, they won’t look upon you very favorably.
FYI: All the best accounting software can help you stay on top of your company’s finances year-round. Consistent accounting and these other tax-saving tips will likely mean fewer headaches during tax season.
3. Determine what options and resources are available to you.
It’s helpful to remember that, above all, the IRS wants to collect the money you owe. That’s what best serves its purpose as a government agency and the tax system as a whole. The IRS may be intimidating and can make your life much harder, but the agency isn’t interested in being punitive for the sake of it. The IRS is well aware it can only collect money if it actually exists. Accordingly, it provides options to make payment feasible for people and businesses in difficult situations.
If you can’t pay everything you owe, consider credit options such as an installment agreement, which is a payment plan through the IRS. If you make those payments on time, you won’t receive any additional penalties. (However, an installment agreement still carries interest, as well as its own processing fees.)
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. [Related article: How to File Payroll Taxes]
Whatever route you ultimately take, it will make a difference to pay what you can as soon as possible (ideally when you file your tax return). Determine what’s currently doable, considering your income, assets, and other debts. Interest and penalties are calculated based on the remaining unpaid tax amount, so you can meaningfully reduce the total amount you pay, even if you seem to be only chipping away at it.
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3. 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, there’s a larger issue with your cash flow management that you need to address and adjustments you need to make. Thankfully, there’s a good chance that working out a resolution with the IRS will not dramatically affect your day-to-day operations. You just need some help figuring out your options (and ways to increase cash flow for your company going forward).
You may be in a financially precarious situation and want to avoid incurring any additional costs, like hiring an accountant for your business. However, you’ll ultimately be much better off consulting a professional to figure out a sustainable plan that allows you to pay your taxes on time. A CPA can greatly reduce your uncertainty and anxiety surrounding your business’s taxes. Next time tax season rolls around, it might even feel routine. [Here’s how to determine if it’s time to hire a CPA.]
Did you know? The best tax debt relief services can connect you with knowledgeable tax professionals to resolve your outstanding taxes.
What it means to be past due on your taxes
Being past due on your taxes means you have an unpaid balance that you owe to the IRS. This balance is called the principal. You’ll also have late fees and interest added to the principal; these will accrue until you pay off the full balance. This is why you want to address past-due balances as soon as possible – they only get worse as time goes on.
Keep in mind 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.
Tip: Paying your estimated business taxes throughout the year reduces the pressure to come up with 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, including levies or liens against your business. A levy may mean the IRS seizes some of your company property, while a lien means it has an ownership claim on your company’s assets until you pay off your debt. It may also apply surcharges for each month the taxes go unpaid, further hurting your finances.
With unpaid taxes, you might also be unable to get a small business loan to fund company operations – especially if there is a lien or levy on your business, as these are considered derogatory items on a credit report. This is another reason why it’s critical to keep a close eye on your business finances.
Kimberlee Leonard contributed to the writing and research in this article.