Most business owners understand that they’re required to pay taxes. They must ensure that their accounting records are well-kept and accurate. By doing so, the IRS can determine how much they owe. But what happens if your business is unable to pay the amount that it owes for that year?
While each scenario is different, there are several possible outcomes. The interest and penalties may accrue. Your future tax refunds may be forfeited. There’s also a chance that your property may be foreclosed.
Back taxes are a problem that a lot of small businesses face. And many worry that this could result in the end of their company. The good news is that your debt doesn’t have to ruin your livelihood.
Below are a few tips for handling back taxes for your business.
Keep the Lines of Communication Open
The IRS may not come to collect the money from you immediately. But they do have the technology to instantly generate levies and liens. And this can be as intrusive and worrisome as human debt collectors. This usually happens when the business owner ignores their debt.
If you want to save yourself some undue stress, keep the lines of communication open. Let the IRS know that you’re aware of the debt and want to stay in touch with them until it’s paid off. Also, keep in mind that the longer you ignore this issue, the more your interest and penalties will accrue.
Negotiate a Discount or Arrange a Payment Plan
Another benefit of communicating with the IRS is that it gives you the ability to negotiate. It’s unlikely that you’ll be able to do anything about your penalties and interest, but you may be able to talk them into reducing the amount that you owe.
You could also arrange a payment plan. By turning your debt into monthly installments, it makes it more manageable. Ultimately, you won’t feel as overwhelmed.
Apply for an Offer in Compromise
Perhaps you’re unable to pay the amount in full or maybe paying off the debt would cause financial hardship. In these instances, you can apply for an offer in compromise. This is an agreement that allows you to pay less than the full amount. In fact, those who qualify for an OIC pay pennies on the dollar.
The process is formal and lengthy. It requires business owners to fill out forms and provide details about their financial situation. If the IRS deems that they’ll be able to collect more from you now than they would in the future, they’ll approve your application. However, if they find that you can pay your debt off through installments, they’ll offer a payment plan instead.
Apply for “Uncollectible” Status
You could also be eligible for “uncollectible” status. This status is offered to businesses that simply can’t pay their debt. Ultimately, it means that the IRS will hold off on collection. They won’t levy your bank account or require installment payments.
Instead, your payments will be deferred. The hold is temporary and you’ll still owe the government, but this will give you a chance to get your finances in order and devise a sound plan. This allows you to make a plan and start paying off your back taxes without feeling rushed or pressured.
It’s important to keep in mind that even if you’re eligible for this status, the IRS can still place liens on your property or withhold future tax refunds until the debt has been paid. Also, the interest and penalties still accrue during this time.
Hire a Tax Lawyer
There are several things you should know about taxes and small businesses. One of the most important is that it’s a good idea to hire a tax lawyer. They can offer the advice that you need for your specific situation.
Tax attorneys are trained to work as advocates for you if your business is under investigation or is being audited. They have the experience and skills to navigate the regulations in your state, which makes it easy for them to negotiate for you and secure the best agreement.
File for Bankruptcy
In extreme cases, you may want to consider filing for bankruptcy. Under Chapter 7, you stop all operations and close down the company. This is a drastic measure, but it can either reduce the debt or wipe it out altogether.
Find Tax Professionals in Your Area
There’s no question about it, business taxes can be stressful. This is particularly true if you owe back taxes and aren’t sure how to handle it. The key is to work with someone who knows how to prepare taxes, prevent liens and levies, and negotiate on your behalf.
Luckily, search engines and local professional networks make it easy to find an expert in your area. All it takes is a simple Google search like “help with taxes in Sacramento,” and you’ll have a great list of local professionals to sort through.