Your Company Has Outstanding Taxes: What's the Next Step?

Understanding Back Taxes: Navigating the Challenges Faced by Business Owners

Reviewed by tax specialist Erica Gellerman, CPA, this guide aims to shed light on the significant issues that arise when business owners fall behind on their taxes. It's understandable; with a myriad of daily responsibilities, many entrepreneurs strive to settle their small-business taxes by the due date. Yet, amidst the hustle, deadlines can slip through the cracks, especially when the tax bill is too hefty to handle.

The Consequences of Ignoring Tax Responsibilities

When taxes go unpaid, a chain of complications and penalties may follow. If you find yourself entangled in back taxes, it's crucial to understand the potential repercussions and, more importantly, how to regain control of your finances.

Key Tax Filing Deadlines

Businesses typically face mandatory tax deadlines, with most required to file their returns and settle their tax obligations by March 15 or April 15, depending on the business structure. However, if these dates coincide with weekends or holidays, the filing is pushed to the next business day. Missing this timeline can lead to back tax liabilities and, consequently, complications down the line.

Recognizing the Problems Arising from Outstanding Taxes

Failure to pay taxes can lead to numerous troubles:

1. Interest and Penalties: The longer you wait to resolve overdue taxes, the more interest and penalties can accumulate. If your return is filed more than 60 days late, for example, you could face a minimum penalty of $205 or more, plus interest and additional monthly fees.

2. Losing Your Tax Refund: You may be confident that your taxes are overpaid and expect a refund, but the IRS places limitations on refunds. If you haven’t claimed your refund within three years, it may become a non-reclaimable contribution to the U.S. Treasury.

3. Potential Property Foreclosure: Ignoring overdue tax notices from the IRS can lead to tax liens on your property. If a payment isn't made within ten days of a notice, complications may escalate, allowing the IRS to claim your business assets.

4. Passport Revocation: Owing more than $53,000 in back taxes without an installment agreement may lead to the revocation of your passport.

5. Risking Jail Time: While rare, ignoring IRS communications may culminate in severe consequences, including potential incarceration.

Steps to Take When Facing Back Taxes

If you find yourself behind on taxes, consider these key strategies to manage the fallout:

1. File for an Extension: An extension can buy you additional time until fall to sort out your taxes. It won’t lessen what you owe or stop penalties and interest, but it allows you to prepare thoroughly.

2. Respond Promptly to IRS Notices: Open communication with the IRS is crucial, even if finances are tight. Acknowledging their correspondence helps maintain a cooperative relationship.

3. Explore a Payment Plan: If immediate payment is unfeasible, consider setting up a payment plan with the IRS. Short-term and long-term options are available, and, if applicable, an Offer in Compromise could settle your tax debt for less than owed.

4. Request Currently Not Collectible Status: If the IRS determines you can't afford basic living expenses while settling your tax debts, they might place your account in a “currently not collectible” status, temporarily ceasing collection efforts.

5. Seek Professional Guidance: When in significant debt, consulting a experienced CPA or tax attorney can provide invaluable guidance for resolving tax issues.

6. Consider Bankruptcy as a Last Resort: While this is a complex decision, bankruptcy may be a viable option for business owners facing insurmountable tax debts.

Filing Amendments and Back Taxes

If you’ve submitted your taxes correctly but made an oversight, an amended return should be filed promptly. Conversely, if you've missed the deadline altogether, the IRS has modernized the process for addressing past due tax returns. You can now electronically file for the past two years, while earlier years require traditional paper forms.

Gathering Necessary Documentation

Digging up tax documents may be essential, especially if you’ve moved beyond two years without filing. If your business is your primary income source, ensure your bookkeeping reflects accurate transactions so you can file previous years correctly.

Consult historical bank statements and reach out to your employer for payroll documents like W-2s or 1099s, as they retain these records for several years. If copies are unattainable, the IRS can provide tax transcripts through a request.

The Importance of Tax Compliance in Loan Applications

Paying back taxes promptly is crucial, particularly when applying for a business loan, as lenders typically require recent tax returns for assessment. This helps verify income accuracy and assess profitability trends, enabling a thorough understanding of your financial standing.

Moreover, poor tax filing can raise red flags about responsibility and trustworthiness, impacting loan approval. Even if your business finances are in order, personal finances may come under scrutiny, especially if you've not filed personal taxes correctly. Filing those returns before seeking business funding is advisable.

In conclusion, staying on top of tax obligations is not just about avoiding penalties—it's essential for your financial health and credibility as a business owner. Staying informed and proactive can ultimately safeguard your future success.