Back Taxes Are No Laughing Matter For A Small BusinessBy SCORE
Jul. 15 2020, Published 3:45 a.m. ET
Business owners don’t like managing taxes. And it’s understandable. Time spent managing taxes is time that could otherwise be spent making money. Coupled with the fact that business owners are busy tackling what’s right in front of them – running the day-to-day business – it’s not hard to see how administrative tasks can get bumped to the sidelines. Unfortunately, though, this can be the perfect recipe for brushing right past tax filing deadlines and owing the IRS.
If you don’t file and pay your business taxes by the due date, you’ll owe back taxes. Back taxes can have serious consequences for a small business.
This list is just a few of the challenges you’ll face if you don’t pay.
- Interest and penalties
- Seized business assets
- Difficulty securing lines of credit
- The list goes on
When your business owes money to the IRS, a snowball effect of consequences follows you around until that debt is paid. Not only will you pay interest on that debt, but the IRS will hold any future tax refund your business is entitled to until the past-due tax is paid.
When the IRS assesses exactly how much tax you owe, they won’t account for deductions or other tax benefits. That means you’ll likely owe more than you would have had a tax professional prepared your return.
If you’re self-employed, the consequences can hit your personal savings as well. That’s because any income you earn during the time the back taxes are due won’t be reported to Social Security which could impact your retirement earnings.
If that weren’t enough, owing the IRS can make it much harder for your business to secure loans or other types of financing that would alleviate the cash crunch in the first place. That’s because financial lenders require your business to submit tax returns to even qualify for the loan. If you owe back taxes, the worst thing you can do is hide your head in the sand.
Coming up with a plan to pay and then working to eliminate your debt is the only way forward. Yes, dealing with the IRS can be a challenge, but it’s doable.
What You Can Do To Eliminate Your Debt And Wipe The Slate Clean.
Don’t ignore t. If you fail to file your return and pay your taxes, you’ll receive a notice from the IRS letting you know your return is past due. It’s tempting to file away the letter as you continue to juggle the tasks of running your business. Every day you delay responding, however, the more you risk getting your business into even deeper trouble.
Prioritize the payment of back taxes. Once you receive that letter, your next step is to reprioritize all other payments your business makes and push your back taxes to the front of the line. If you have to adjust vendor or supplier payments to free up enough money to pay the taxes, do it. The IRS can cause you far greater grief than any vendor or supplier can if you don’t pay your debts.
Get professional help. Your accountant or tax preparer can help you properly handle back taxes and advise you on the best way to proceed. With their support and guidance, create a plan with a definitive date for when you’ll have the tax debt paid in full.
Be proactive. Respond to the IRS letter right away with the information they request of you. It’s important to show that you’re willing to work with them and take the handling of your debts seriously.
You Have Options For How And When You Pay Your Debt.
If you haven’t filed your tax returns due to an error, file the past-due return the same way you would file an on-time return.
If you haven’t filed your tax return and you still can’t do so, file for an extension. This won’t reduce the amount of money you owe or the due date on your return, but it will give you and your tax preparer more time to get your returns in order.
If you’ve filed your business tax returns but can’t pay the full amount owed, see if you can get an additional 60-120 days to pay your account in full. Read more about this option on the IRS website and apply online for a payment plan.
If you need more than 120 days to pay your back taxes, you may be eligible for an installment plan. The option of an installment plan is open to businesses that owe $25,000 or less in combined payroll and other business taxes, penalties and interest, and can pay the full amount within 24 months. You can apply using the online payment agreement application. If approved, set up automatic debit payments from your account so you don’t have to worry about missing a payment and incurring additional penalties.
If you’re not eligible to use the Online Payment Agreement application, call 800-829-4933 or the phone number on the IRS notice you received.
If you can’t pay back taxes owed in 24 months, see if you qualify for the IRS’ Offer in Compromise program. This is a last-ditch option that allows you to settle your tax debt for less than the full amount you owe if you can’t pay your entire liability amount or if paying the full amount would place you in considerable financial hardship. The IRS will consider your ability to pay, income, assets, expenses, and other similar factors. You’re not eligible, however, if you’re in an open bankruptcy proceeding.
This Offer in Compromise pre-qualifier can help you determine if this route is viable for your business. If you decide to apply, download the Offer in Compromise Booklet and Application Forms to begin the process.
Once Your Debts Are Paid, Take Steps To Avoid Owing Again.
The biggest steps toward avoiding back taxes include filing your return by the due date, working with a professional accountant, prioritizing IRS payments over payments to vendors and suppliers, and more.
One of the best ways to stay on top of your tax return and payment responsibilities is with the help of a SCORE mentor. Your SCORE mentor will work with you to create a plan so your returns are filed on time and your cash flow can support tax payments when they’re due. Contact a SCORE mentor today.
This article was written by Bridget Weston and originally appeared on SCORE.