Your Company is Behind on Taxes: What's Your Next Move?

Understanding Your Business's Tax Obligations

Reviewed by taxation guru Erica Gellerman, CPA, this article delves into a crucial aspect of small business management: taxes. While most entrepreneurs diligently aim to meet their tax obligations by the deadline, life’s unpredictability can sometimes leave important tasks unattended. Whether it’s juggling multiple responsibilities or facing a daunting tax bill, any business owner can find themselves at risk of falling behind.

The Urgency of Addressing Back Taxes

Ignoring your filing and payment responsibilities can spiral into a pile of complications that threaten your business’s financial stability. If your business is behind on taxes, understanding your next steps is essential for regaining control of your finances and sidestepping harsh penalties.

Key Deadlines for Filing Taxes

Typically, businesses must submit their tax returns and clear their dues by either March 15 or April 15, depending on their structure. If you let that deadline slip, your business is officially in arrears with the IRS, and consequences await.

The Consequences of Delinquent Taxes

Back taxes bring a host of challenges, including:

Accumulating Interest and Penalties: The longer your dues go unpaid, the heavier the financial burden. A delay of over 60 days can rack up a minimum fine of $205 or 25% of the owed amount, compounded by interest that only increases over time.

Potential Loss of Tax Refunds: If you believe you're entitled to a refund due to overpaid taxes, don’t wait too long to file. After three years, the IRS might classify your refund as a donation to the Treasury.

Risk of Property Seizure: Missing payments can lead to an IRS tax lien on your property. Ignoring their notifications could eventually result in asset seizure, including personal assets if you operate as a sole proprietorship.

Passports at Risk: Failing to file taxes for multiple years, or owing over $53,000 without any payment plan, could see your passport revoked.

Possibility of Jail Time: While it’s a rare scenario, ignoring IRS notices can result in criminal charges.

Proactive Steps to Take

When faced with overdue taxes, prompt action is vital. Here’s how you can mitigate problems:

Request an Extension: Need more time? File for an extension to postpone your filing deadline. While this won’t eliminate owed taxes or stop accumulating penalties, it grants breathing room.

Respond to IRS Communications: Timely responses to IRS notices can prevent further complications. Keeping the dialogue open, even when you can’t pay, is crucial.

Explore Payment Plans: If managing your tax bill is a struggle, consider setting up a payment plan or applying for an offer in compromise, allowing you to settle your payment for less than owed.

Request Currently Not Collectible Status: For businesses facing dire financial straits, you can seek a temporary reprieve from IRS collection efforts while interest and penalties still accrue.

Consult a Professional: Hiring a CPA or tax attorney can provide valuable guidance, especially if you're grappling with significant debt.

Assess the Option of Bankruptcy: As a last resort, bankruptcy could relieve overwhelming tax burdens, but consider this route carefully.

Amending Past Mistakes

If you discover errors in your timely filed return, make sure to file an amended return to correct them. Conversely, if you failed to meet your tax obligations, it's worth noting that the IRS has simplified the process to catch up on overdue returns, allowing electronic filing for certain years.

Recovering Lost Documents for Tax Filings

For those behind on filings, gathering necessary tax documents may be challenging. Reconstructing your financial records via bank statements will be essential, especially if your business is your primary income source. If you need past W-2s or 1099s, reach out to your prior employers or the IRS for transcripts when necessary.

The Importance of Timely Tax Filings for Loans

If your business seeks funding, having your taxes in order is critical. Lenders often require recent tax returns to assess your financial health, and tax history plays a significant role in verifying income and showcasing your reliability as a borrower. Neglecting your tax filings can hamper your ability to secure funding when your business needs it most.

Maintaining Personal Financial Responsibility

Since personal finances can heavily influence loan approvals, ensure both personal and business tax returns are filed before seeking new funding opportunities. Engaging in a proactive approach not only strengthens your financial standing but enhances your credibility with lenders.

In summary, taking charge of your tax obligations and understanding the avenues available to rectify your situation can empower you to navigate your business’s financial landscape more effectively.