In a perfect world, everyone would qualify for a refund come tax season. Unfortunately, small businesses frequently owe the Internal Revenue Service (IRS) money at the end of the fiscal year. And while it’s understandable that an entrepreneur may struggle to raise sufficient tax funds, failing to pay the IRS its due is not an option.
As a small business owner, it’s crucial that you understand what happens when your business owes the IRS money so you can protect your company’s interests moving forward.
Tax Penalties and Fines
Companies who fail to pay their taxes on time may suffer a number of unfavorable consequences. Here are some of the side effects of falling behind on your tax payments.
When a business fails to make its tax payments, the IRS typically responds by sending a notice informing the company of what is owed. While you may be tempted to toss these notices in the trash or tuck them away in a filing cabinet, ignoring the IRS will only result in additional fees and penalties being levied on your business. If you don’t make restitutions within 30 to 60 days, the IRS may even assign an agent to handle the case.
Fees and Penalties
The IRS levies penalties on businesses that fail to file taxes or pay the full amount due. In fact, companies that file after the April 15 deadline may be on the hook for an additional 5% of the taxes owed each month up to a maximum of 25%. Furthermore, businesses that don’t file within 60 days of the due date will face a penalty of $135, plus an interest rate equal to the federal short-term rate plus 3% on the amount owed.
In the long run, companies that neglect to make appropriate tax payments may find themselves owing a great deal more before all is said and done.
Loss of Benefits
Along with levying fees and penalties, the IRS can suspend benefits from business owners who fail to pay taxes on time. Under the Federal Payment Levy Program, the government has the right to seize an individual’s Social Security earnings. This can be especially problematic for entrepreneurs who start their businesses in retirement and rely on benefits to make a living.
Levies are considered the final act of taxation enforcement, involving the seizure of taxpayer property to satisfy a debt. Because the IRS can levy the assets of businesses that default on their taxes, entrepreneurs must take pains to file on time and pay all that they owe. In fact, business owners who don’t have the cash to pay can wind up losing their cars, company equipment and even their properties.
Rectifying IRS Issues
Small business owners have a tendency to pay off suppliers before the IRS, and as a consequence, they often struggle to make necessary tax payments. Fortunately, there are steps your business can take to avoid property seizures and other negative consequences associated with nonpayment.
If you’ve received a notice from the IRS, start by reaching out to the agent handling your case. In many instances, the IRS will work with you to create a payment plan that works for all those involved. Here are a few ways in which the IRS helps small business owners reconcile their tax debts.
Companies that are unable to file their taxes on time should request an extension rather than default on their payments. Although extensions don’t eliminate applicable fees and penalties, they do give businesses an extra 120 days to file their taxes without suffering additional negative consequences. In the long run, filing an extension can help you avoid a great deal of stress while keeping your company in good legal standing.
Keep in mind that this extension gives you extra time to file your taxes. You will still have to pay any amounts owed by the applicable deadline.
It’s no secret that small businesses often struggle to become profitable. If your business is unable to satisfy its tax burden, you may qualify for a type of payment plan known as an installment agreement. If you owe less than $50,000, you can receive a 72-month installment agreement simply by asking for one.
While installment agreements can prevent the IRS from levying your property, it’s important to note that this repayment method often comes with a hefty interest rate. Additionally, taxpayers who fail to file returns or make estimated payments when necessary will not qualify for installation agreements.
While being dubbed uncollectable doesn’t put a halt on tax penalties and interest, it will stop the IRS from suspending benefits or attempting to levy assets for the agreed-upon period. Because taxpayers can’t remain in this status forever, you will still need to find a way of satisfying your tax burden in the long term.
No one wants to admit that a business venture may be a failure. However, companies that have neglected to file for several years may see bankruptcy as the only way to escape steep tax fees and penalties. While bankruptcy can stop the IRS from seizing property and assets in the short term, in many cases the organization will resume its efforts to collect tax liens down the line. For this reason, declaring bankruptcy might not be as effective as taking out a loan or requesting an installment plan to satisfy back taxes.
Owing the IRS money can be seriously stressful. However, ignoring your tax problems won’t make them go away. In the long run, a business that neglects to meet its tax obligations may even be forced to close its doors. If you owe back taxes, consider contacting a qualified tax professional who can help you create an installment plan that works for everyone involved.
For more info on business taxes, see our article on 10 red flags that can trigger an audit.
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