You owe taxes. Those three words strike fear into the heart of every business owner. Having the IRS hound you for missed filings, payments, and penalties is a nightmare and certainly not the way to keep your business’s bottom line in the black.
Most business owners are meticulous when it comes to filing and paying the IRS appropriately. However, there are always times when things can trip us up and make us miss something. What if you had a slow start to the year or a massive emergency at your business? What if you maxed out your personal credit cards to cover your business’s expenses and now can’t pay both the creditor and the IRS? Thankfully, the IRS does give you a bit of leeway in repayment options and it is not impossible to get caught up. Here are some options so that you can make the best decision for your business.
But first, let’s talk about what happens when you get behind. As they say, the best offense is a good defense, so staying on top of filings and payments is the best course of action. If you can’t avoid being late, be prepared for the following:
- Penalties—There are “fail to file” and “fail to pay” penalties assessed by the IRS. If you file in time, but don’t pay the tax, you will be assessed a fail to pay penalty. This is one half of one percent of the amount of tax owed for each month it is not paid and can go up to 25% of the amount owed. If you fail to file and fail to pay you will also have to pay the fail to file penalty which is 5% of the amount owed for up to 5 months. After 60 days, the IRS will assess a minimum penalty of either $135 or 100% of the tax owed, whichever is less.
- Loss of Benefits—In some cases the IRS will seize your benefits, like a portion of your Social Security benefits. If you started your business after you retires, this can be extremely problematic because you may be relying on those benefits.
- Tax Liens—The IRS may file a Notice of Federal Tax Lien that alerts creditors that the government has an interest in your personal and/or business property. Tax liens are often reported by the major personal and/or commercial credit reporting agencies, depending on the type of lien. Tax liens can lower your personal and/or business credit scores, and can make it difficult to get financing.
- Property Seizure—This is the last step the IRS will take to satisfy the debt owed. They can take business’s vehicles, equipment, and even property.
But, there is hope. Let’s take a look at what a business can do if they find themselves in this situation.
- File Your Tax Return—The fail to file penalty is much more than the fail to pay penalty, so it would make sense for the business to file even if they cannot pay the amount owed. This way you aren’t accruing both penalty charges.
- Ask for an Extension—If you can’t file on time, you can fill out Form 7004 to ask for a five month extension on your returns.
- Temporarily Delay the Collection Process—If you cannot pay the debt, you may contact the IRS to set your account as currently not collectible. This, however, does not make the debt go away and you will still be accruing penalty and interest charges. In addition, you will need to file a Form 433-B, also known as a Collection Information Statement so that you can prove you can’t pay them.
- Installment Plan—If your business owes less than $25,000 and you have filed all of your returns, you may qualify for an installment plan which gives you more time to pay off your debt.
- Offer in Compromise—The IRS offers this as a sort of last-ditch option and they encourage to explore all other payment options before sending an offer in compromise. The offer in compromise gives you the opportunity to settle your debt for less than the amount you owe. The IRS looks at several factors to determine whether paying the full amount would create a financial hardship, including ability to pay, assets, income, and expenses. If the IRS believes that the offer you make in compromise represents the most that they could hope to collect in a reasonable amount of time, they will approve your offer. If you go this route, make sure to consult with a tax professional. All of your filings must be complete and you cannot be in an open bankruptcy proceeding.
The IRS may abate your penalties and fees if you have a reason for paying and filing late and it wasn’t just neglect. The best method for staying in the IRS’s good graces is to file on time, apply for an installment plan if you are able, and make the minimum tax payments on time. Remember that it is always wise to contact a tax professional with questions on small business tax preparation to make sure that you are making the best choices for your business.