As a business owner, managing taxes can be a challenging task. The time and effort spent on tax-related matters can take away from your primary focus of running and growing your business. Unfortunately, neglecting your tax obligations can have serious consequences, including accruing back taxes and facing penalties from the IRS.
Discovering your business owes back taxes can trigger immediate concern and strain your organization’s financial stability. However, it’s essential to face the issue with a pragmatic mindset immediately. Ignoring or delaying a response will lead to further penalties, interest accumulation, and possibly civil or criminal actions.
This comprehensive guide will explore the various options and resolutions available to businesses that owe back taxes, helping you navigate the process and find a viable solution:
What are the Consequences of Owing Back Taxes?
When your business fails to file and pay taxes by the due date, it incurs back taxes. These back taxes can lead to various problems and penalties that can significantly impact your business’s financial health and future prospects. Some of the consequences of owing back taxes include:
- Interest and penalties: The longer you delay paying your taxes, the more interest and penalties accumulate. The IRS imposes penalties for late filing and payment, ranging from a minimum of $205 to 25% of the taxes owed, plus interest.
- Seizure of assets: If your tax debt remains unpaid, the IRS can seize your business assets, including bank accounts, property, and even personal assets if you operate as an unincorporated business.
- Negative impact on credit: Owing back taxes can make securing lines of credit or loans difficult for your business. Financial lenders often require tax returns for loan qualification, and unpaid back taxes can raise red flags and hinder your ability to access much-needed financing.
- Withholding tax refunds: The IRS may withhold any future tax refunds your business is entitled to until the back taxes are paid. This can further strain your cash flow and make it challenging to cover ongoing business expenses.
- Impact on personal savings: If you’re self-employed, paying back taxes can affect your personal savings. Failure to report income when back taxes are due can affect your supplemental security income (SSI) later on, as it may not be reported to the Social Security Administration.
It’s crucial to address your tax debt promptly to avoid these consequences and restore financial stability to your business.
How to Eliminate Small Business Tax Debt
When faced with back taxes, taking immediate action to resolve the issue and eliminate your tax debt is essential. Here are the steps you can take to navigate the process effectively:
1. Don’t ignore the issue
Ignoring the IRS notices or delaying your response can aggravate the situation. As soon as you receive a notice, acknowledge and address it promptly to avoid further penalties and complications.
2. Prioritize tax payment
Once you receive a notice, prioritize your tax payment over other expenses. Adjust your cash flow to free up funds and allocate them towards paying your tax debt. Communicate with vendors and suppliers if necessary to renegotiate payment terms temporarily.
3. Seek professional help
Engaging the services of an experienced accountant or tax preparer can be invaluable in dealing with back taxes. They can guide you through the process, help you prepare your returns accurately, and advise on the best course of action to resolve your tax debt.
4. Be proactive in communication
Respond to IRS notices promptly and provide the requested information. Demonstrating your willingness to cooperate and resolve your tax debt will show the IRS that you are taking the matter seriously.
7 Options for Resolving Back Taxes
Several options are available for resolving your tax debt depending on your circumstances. Consider the following solutions and choose the one that best suits your business’s financial situation:
1. File or amend your tax returns
If you haven’t filed your tax returns, do so immediately. File the past-due returns the same way you would file an on-time return. Additionally, if you discover any errors in your filed returns, file an amended tax return to rectify the mistakes.
2. Request an extension
Request an extension if you cannot file your tax return by the due date. This will give you additional time to gather the necessary information and complete your returns accurately.
3. Negotiate a payment plan
If you’re unable to pay your tax debt in full, request a payment plan with the IRS. Most tax debtors are eligible to set up monthly installment payments to pay off their back taxes gradually. The IRS offers an online payment agreement application to simplify the process.
4. Apply for an installment plan
You may qualify for an installment plan if you need more than 120 days to pay your back taxes and owe $25,000 or less in combined payroll and business taxes, penalties, and interest. Apply online using the IRS online payment agreement application and set up automatic debit payments to avoid missing payments.
5. Explore the Offer in Compromise program
You may be eligible for the IRS’s Offer in Compromise program if you’re facing significant financial hardship and cannot pay your entire tax liability. This program lets you settle your tax debt for less than the total amount owed. The IRS will consider various factors, such as your ability to pay, income, assets, and expenses. This option is unavailable if you’re in an open bankruptcy proceeding.
6. Consider “currently not collectible” status
If your business is in dire financial straits and unable to cover reasonable living expenses while paying back taxes, you can request “currently not collectible” status from the IRS. While this status doesn’t eliminate your tax debt, it temporarily suspends collection efforts, giving you time to improve your financial situation.
7. Explore bankruptcy as a last resort
Bankruptcy should be considered as a last resort option. Filing for bankruptcy can reduce or eliminate some tax debts, but it’s a complex process that requires careful consideration and legal guidance.
Navigating Back Taxes with Vigilance and Expertise
Dealing with back taxes can undoubtedly be a stressful and daunting experience. However, carefully evaluating payment options, seeking professional guidance, and exploring penalty relief measures can offer much-needed respite. Being proactive and willing to resolve the situation shows good faith and helps restore the IRS’s confidence in your business.
Tax resolution is not just a one-time effort. Staying vigilant, monitoring progress, and maintaining ongoing tax compliance can go a long way toward preventing future pitfalls and ensuring a healthier, more predictable financial landscape for your business.
Need help with your information return filing? Connect with eFile360 today. We’re here to make tax complexities manageable and provide best-in-class support for your filing needs.