As a business owner, having to pay state and federal income taxes annually can pose as threat. If your business isn’t doing so well, and cashflow is down, coming up with money for your tax return can be overwhelming.
If you find yourself in this situation, do not panic. There are specific tips and steps to follow
in order to make this process flow smoothly for both yourself and for the Federal Government and/or state. Being able to identify what the specific issue is will allow you to come up with resolution.
This article will help business owners identify the most important actions to take if you find yourself unable to pay your business taxes. These tips will help avoid running into bigger issues during tax season, and allow you to resolve the issue efficiently.
Contact the IRS (Internal Revenue Service)
First things first, do not avoid the situation. Contact the IRS and let them know the what is going on. The last thing you want is to avoid due dates. You can meet in person with the IRS, and set up a meeting here. Prior to your appointment, make sure you prepare with the proper documents such as having copies of all unpaid tax returns, as well as an IRS Form 433-B, and anything else that pertains to your situation.
Pay as Much as Possible: Just because you are unable to pay the full amount of your taxes, doesn’t mean you shouldn’t pay them at all. You want to avoid a tax lien, which the Federal Government uses in order to collect back taxes. Items that would be collectible under these circumstances may be property such as real estate, personal property, bank accounts, and financial assets. Therefore, even if you can’t pay all you taxes in a lump sum, pay as much as you can.
Consider Asking for Payment Deferral: Contact the IRS and ask for a temporary delay. They will asses your financial status and will possibly report your account as not collectible. This will temporarily delay your amount owed until your finances improve. This will require you to provide the IRS with information about your assets, financial statements, monthly expenses, and monthly income. Keep in mind that just because you ask for a delay, does not mean you will get one. It is important to also have a backup plan in case this does not work.
Review Payment Plans Offered by the IRS (monthly installments): If you can’t pay all at once, consider an installment agreement offered by the Government. This will allow you to pay your tax payments in monthly payments. The IRS raised its threshold for streamlined installments up to $50,000, and allow pay back to be up to six years. If you owe less than $50,000, then you do not need to fill out an IRS Form (433-A, 433-B or Form 433-F). Even if you are approved for an installment agreement, you will still owe interest on any tax not paid by the due date. This is why it is crucial to pay as much as possible upfront, to avoid paying more in interest. The IRS offers short-term and long-term payment plans depending if you are an individuals or business.
If this is your first time setting up a payment plan, make sure you consider all other options before jumping into an installment plan with the IRS. Compare rates with loans from lenders and banks, credit companies, and even credit cards if you owe a small amount. The application and approval process for a loan isn’t always the fastest, so make sure you keep this in mind. Obtaining a line of credit can be a faster way of getting your hands on money. Further, setting up an emergency line of credit can be beneficial if you ever find yourself in a similar situation again.
Reach an Agreement With the IRS: Having any unpaid taxes will result in larger and compiling issue for both you and your business. Having unresolved tax payments is not a position any business owner wants to be. Instead, the IRS has an Offer in Compromise(OIC), that allows taxpayers to permanently settle their tax debt for less than the amount they owe. This is one of the last solutions to consider, and should only be looked at after all other options have been tried. In very limited circumstances the IRS will offer a penalty abatement, which is a waiver given to individuals who have failed to pay their taxes, or failed to file. Furthermore, even if the IRS offers you a penalty abatement, it is even harder to get interest abatement, which waives the interest associated with your taxes. Just because you think you may have reasonable cause, interest is never abated in regular circumstances.
Consequences of Not Paying Taxes
Unfortunately, is is common that business fail. When a business fails and payments/taxes can’t be paid, it is important to tackle the issue head on in order to avoid compounding issues. Allowing penalties to build up will only hurt you more in the end than it is now. Some of the potential penalties your business could face include:
- Failure to File Penalty: If you missed the deadline to submit , you are subject to get penalty. If you were granted an extension to file and missed that deadline too, you will also get a failure to file penalty.
- Failure to Pay Proper Estimated Tax Penalty: This can occur if you fail to make monthly payments on time
- Penalty if your payment doesn’t go through: As a taxpayer, you have a tax liability which is to pay your taxes. If your payment does not go through, the IRS will think you failed to pay your taxes. This will result in any of the penalties listed above.
- Interest on Tax Payments: Even if you settle on a payment agreement with the IRS, you are still subject to interest on monthly payment.
- Loss of Property, Savings, and Assets: If you are in a financial situation where you owe the IRS money, they can seize any assets that you have if you fail to make payments.
Payment Options To Relieve Tax Debt
If you are struggling to pay state Taxes, you might want to look into state Tax Relief Programs. Each state will differ on their policies for tax relief. You can find the different state rules for tax debt relief here. Depending on your state, you may be able to get interest waived, but not penalties. Some states allow for penalties to be waived, but not interest.
If you have been hit by the Coronavirus and are unable to pay your Federal Taxes, you can visit the IRS.gov to view their relief program. The IRS implemented their Coronavirus Tax Relief Program to help taxpayers, businesses, tax-exempt organizations affected by (COVID-19).
Furthermore, the IRS offers small business loans through their SBA (Small Business Administration). Not all of their loans allow for repaying tax debt, so it is important to look at all of their programs. You can find a detailed list of all of the SBA’s loan programs here.
If you re struggling to complete this process, you may want to get help from a qualified tax professional. As a taxpayer, it can be easy to miss deadlines and compile all the proper paperwork that the Government and state ask for. Seeking help from a tax expert such as a CPA could help in the future to resolve these issues. Having a tax preparer can also save you a lot of stress and room for error for future tax years. Having an expert will also allow you to carefully asses how much you owe, or even how much your tax refund will be. Furthermore, seeking help from a professional can help you avoid being hit with a large tax bill without any notice.
The Bottom Line
Paying business taxes whether to the Government or state should always remain a top priority. It is your duty as a business owner to manage your finances correctly. If you find yourself in a sticky situation, seeking help from a tax expert may be your best bet. If you are struggling to come up with money for payments, it may be in your best interest to seek temporary relief either from the IRS, your state, or outside lenders.
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