Most small-business owners are meticulous about making sure their taxes are paid and on time, but sometimes the unexpected happens and they fall behind. We spoke to Terri E. Brunsdon, a CPA and an attorney with the Brunsdon Law Firm, about what options are available for those who find themselves in this position.
Small Business Center: What are some of the reasons that small-business owners fall behind in their taxes owed to the IRS?
Terri Brunsdon: One example is that a business suffers an economic slump and, instead of paying taxes, it pays vendors. The biggest issue I encounter is a business’s failure to remit payroll tax withholdings. Because payroll withholdings are fiduciary taxes (meaning it has been collected from employees on behalf of the IRS), the IRS will hold the business owners, accountant, and any other responsible parties personally liable for the tax.
What power does the IRS have over business owners to force them to pay overdue taxes?
If a business fails to pay its taxes, the IRS can levy and lien its assets. To levy means the IRS seizes financial assets, usually cash in bank accounts or payments from customers. On the other hand, a lien is public notice that the IRS has a priority claim on the business’s assets that must be satisfied before they may be sold. A lien also affects the credit rating of the business. If the unpaid tax is fiduciary, the IRS can levy or lien the assets of the owners and any other responsible party.
What are some of the possible repercussions of not paying business taxes?
If a business fails to address tax notices from the IRS, a local agent will eventually be assigned to the account. This agent will then visit the business to get the issue resolved. If the business fails to cooperate with the IRS, it can levy the assets and, in effect, force the business to close. Although rare, the IRS can also file criminal charges if it feels tax evasion is occurring.
What is an “offer in compromise,” and how should a small-business owner apply for it?
An offer in compromise is considered a “fresh start” for businesses and individuals. This means you can settle back taxes for less than the full amount. There is a caveat: You must be currently compliant with all tax filings and must remain compliant going forward.
The process involved with preparing an offer can be overwhelming for the average person. Therefore, it’s wise to involve a tax professional, such as a CPA or tax attorney. The IRS will thoroughly evaluate a submitted offer and compare the amount offered against its ability to collect the debt within the remaining collections statute of limitation. You should also know that submitting an offer requires full disclosure of detailed records concerning assets, liabilities, income, expenses, and business operations.
What types of installment agreements does the IRS offer small-business owners?
If a small business owes less than $50,000 and can pay the amount in full within 72 months, the IRS offers a streamlined payment plan process. You can often submit a payment plan online. The key is that all required tax filings must be current.
If you can’t submit the plan online, you need to contact the IRS using the phone number provided in your notice, or call (800) 829-4933. Generally the IRS won’t need extensive financial information if the amount of debt falls within the streamlined offer guidelines stated above.
If the small business owes more than $50,000 or needs a longer repayment period, they will have to submit a financial statement form, usually a Form 433-A [PDF], along with supporting documents.
How should small-business owners approach the IRS about an installment agreement?
You need to contact the IRS to see if you qualify for the streamlined payment plan process or if they require a more detailed financial statement from you. Generally, it’s wise to seek the assistance of a tax professional if you are required to submit a financial statement.
What does it mean to have “currently cot collectible” (CNC) status? Who qualifies and how do you apply?
You need to submit a financial statement if you believe that you qualify. CNC status is granted automatically when expenses are determined to exceed income. This status is usually short-term and is reevaluated by the IRS on an annual basis.
Is it possible to negotiate with the IRS and have fines, penalties, or a portion of the taxes due eliminated?
An offer in compromise is the only way to reduce the tax owed. However, there are several ways a business may be able to reduce or eliminate penalties. It depends on the facts of the situation. For instance, if a business failed to file its tax return on time and is assessed a penalty, it can call the IRS and have this immediately abated if this is the first instance it has failed to file a tax return on time. There may also be other extenuating circumstances that caused a business to not comply with the tax law, such as a fire or flood. In this situation, the business can file an abatement request to reduce or eliminate the penalties.
Can small-business owners rectify the situation on their own, or is it necessary to hire a professional to do it for them?
Business owners may be able to resolve the issue themselves if it involves small issues such as failure to file one return or failure to pay a year of taxes. For larger issues and those requiring submission of a financial statement, it’s wise to hire a qualified tax professional.
If a small-business owner owes back taxes, but is too nervous about the possible consequences, what would you advise?
It is never wise to avoid a tax issue. If you have a tax problem, contact a qualified tax professional, such as a CPA or tax attorney, who has experience in settling tax debt. In my experience, all tax problems can be resolved and the IRS will make every effort to work with businesses and individuals.