Tax time can be stressful enough for small business owners, but for those who find themselves indebted to the all-powerful IRS, this notorious season can be a downright scary time. Many business owners plan and save for an anticipated tax debt each year, but if you didn’t anticipate the correct amount or if your finances didn’t make saving an option, you may worry that it’s the end of the road for you and your business.
The good news is, for the majority, owing money to the IRS this April doesn’t signify the end of the road, and there are plenty of actions you can take to get through this complex and stressful time. Before you give into those feelings of panic and helplessness, here’s a few things you should know.
File on time, even if you can’t pay.
If you owe money to the IRS, you will most likely be required to pay a penalty in the form of a percentage of your balance owed. However, the penalty for not filing your taxes is higher and, like most debt collectors, the IRS will be less apt to work with you if you run for the hills and don’t bother to file. In addition, neglecting your taxes may result in a federal tax lien, which can hurt your business and/or credit ratings.
Your best bet, even if you can’t pay what you owe, is to be up front and honest with the IRS. File on time and contact them to avoid lengthy and often pricy investigations.
By this point you may be saying “But what if I didn’t file them on time?”
If you didn’t file on time, file as soon as possible.
Sure, the IRS may be slow to start the hunt for your return (and payment), but again, the sooner your file, the less you will need to pay in interest and penalties.
It may seem like owing money is the worst case scenario, but failing to file can result in a plethora of issues from problems with your social security benefits if you’re self-employed, to issues obtaining loans as a result of missing tax documentation during the application process.
Know what options are available to you.
You have more than one option if you owe money on your taxes, and many of them do not require you to pay in full by the 15th. Once you’ve determined you are unable to pay the taxes you owe, it’s time to determine the best course of action.
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According to the IRS website, taxpayers who owe money but cannot make the deadline have the following payment options (note: Your taxes must be filed to be eligible for these payment agreements, and not everyone will qualify for these payment arrangements):
Full Payment Agreements.
If you find that you are unable to pay your taxes in full by the deadline but you only need a few more weeks to do so, you can apply for a Full Payment Agreement, which can extend your repayment window by up to 120 days. There are no fees to make this request; however, you will be charged interest on the total liability amount until you make your full payment.
As the name would suggest, this option allows you to pay your tax liability in installments over a series of months using a variety of payment methods (direct debit, payroll deduction, online, via credit card, over the phone, etc.)
Those who choose this payment option will be charged a one-time user fee of $120 upon entering into the standard agreement. However, if you choose to pay through direct debit, the user fee drops to $52. In addition, to set up your payment, you must select the amount you can pay and the day of the month (1st to the 28th) on which you will make your payment.
Of particular interest to small business owners is the In-Business Trust Fund Express Installment Agreement (IBTF-Express IA), which is designed for small businesses with employees. Eligibility requirements maintain that the taxpayer owe $25,000 or less, comply with all filing and payment requirements, and pay the debt in full within 24 months or before the Collection Statute.
Offer in Compromise (OIC)
It may not seem likely, but sometimes the IRS will negotiate with the taxpayer. If you are unable to either make a payment in full or to enter into an installment agreement, you may qualify for an OIC. If eligible, you will be required to pay a reduced tax amount agreed upon by the IRS.
Temporarily Delay Collection
If you absolutely cannot make payments because it will prohibit your ability to fulfill your basic living expenses, it is possible to request that the IRS delay your collection. The IRS will determine eligibility based on the financial information you provide. While this is an option, it should be saved as a last resort since interest and penalties will still accrue throughout your delay.
Consider alternative payment solutions.
Depending on your financial situation, alternative payment methods such as a loan or a line of credit may help you pay on time, avoid IRS penalties, and ultimately pay the money back at a lower interest rate. Sometimes it’s better to owe a lender than to owe the IRS, especially if that means avoiding a tax lien.
Speaking of interest rates, be sure to find out the rates and repayment terms of any IRS repayment agreement and compare them to the rates and repayment terms that would accompany your alternative payment method. You may be tempted to take the easiest course of action, but the wise path is the one that will best fit your financial situation. Maybe a lower interest rate is better for you, or perhaps longer repayment terms — it’s completely based on your financial position.
Pay what you can as soon as possible.
Regardless of what payment method you choose, you can still reduce the overall amount of penalties and interest you may incur by paying what you can as soon as possible.
By making a partial payment, you can lower your total liability and ultimately lower the total interest you’ll pay – the IRS charges interest on the outstanding amount owed, not the total tax amount due. This may not be a feasible option for you, but if it is, it’s worth considering if the payment doesn’t infringe upon your basic ability to meet your cost of living.
If you find yourself stuck between the IRS and a hard place, don’t panic. While owing taxes is not the ideal situation, you do have multiple options to help you weather the storm. The key is to stay calm, maintain an open line of communication with the IRS, and weigh all your options to determine the best one for your unique situation.
Editor’s note: This story was updated April 25, 2018 to reflect the fact that tax liens will no longer be reported on personal credit reports.