Can’t Pay Your Taxes? Don’t Hide From the IRS
The long-delayed 2019 tax season is officially in the rear-view mirror. But for many American individuals and businesses alike, more tax headaches could be on the horizon.
The IRS pushed back this year’s tax deadlines by several months to help taxpayers affected by the COVID-19 outbreak. For many, even that wasn’t enough. A June survey by TaxAudit showed that 37% of taxpayers felt they didn’t have the resources to pay their 2019 taxes.
Since then, the economy still hasn’t snapped back to pre-pandemic levels — far from it. So it’s likely that small business owners and individual taxpayers could run into similar issues during the 2020 tax season in a few months, if not with their quarterly obligations between now and then.
If you find yourself in that situation, one of the best pieces of advice we can give you is this:
Don’t duck the IRS.
Why It Doesn’t Pay to Play Hide-and-Seek
Think about a little kid who does something they know is wrong. Maybe they’ll avoid their parents hoping that being scarce will keep them from being punished. Maybe they’ll even lie to stay out of trouble. But naturally, they’re almost always caught, and the consequences end up being far worse than if they had just fessed up.
The same thing goes with the IRS. Your first instinct might be to stay quiet or even fudge your numbers to bring down your tax obligation. But both those options could land you in even more hot water.
Let’s consider the first option: Staying silent and hoping the IRS just doesn’t notice.
If you fail to file a return, you’re not just on the hook for whatever your obligation would have been. The IRS also will slap a 5%-per-month “failure to file” penalty on you that maxes out at 25%. And believe it or not, the IRS will also charge you interest until they’re made whole.
In the case of quarterly payers, if you simply don’t pay your quarterly taxes, you’ll incur both penalties and taxes.
Lying to the IRS is an even worse decision.
At the more lenient end of the spectrum is a negligence penalty. If the IRS believes you simply didn’t make a good-faith effort to properly state your income or calculate your deductions, it’ll hit you with a penalty of 20% of what was understated.
A step up from that is civil fraud, which can be a 75% penalty. The IRS will typically levy this penalty when it’s fairly clear that a taxpayer is acting fraudulently.
And if the IRS has an airtight case with loads of evidence of fraud, they can file charges against you. Tax evasion is actually a felony — one that carries a maximum prison sentence of five years, as well as a maximum fine of $100,000.
Keep in Contact With the IRS If You Can’t Pay Your Taxes
While the IRS is hardly a cuddly federal agency, it’s not out to “get you.” In fact, the IRS has several ways to help if you keep them in the loop about your issues.
For instance, individuals might qualify for an installment payment plan, and it’s particularly easy to be approved if you owe less than $25,000 and can pay off the amount within five years. In more serious cases, you can apply for an “offer in compromise,” in which you may end up paying just a portion of your tax debt.
Small businesses can get similar concessions, from payment deadline extensions to temporary reprieves and even offers in compromise, though that latter option is only available in very specific circumstances.
If nothing else, simply filing on time will help you avoid the 5% monthly late filing penalty.
Small businesses with tax issues are typically encouraged to talk to a tax professional to go over the various IRS options available to them. The worst thing you can do, after all, is compound an already difficult tax situation by filing the wrong paperwork or choosing a relief plan that doesn’t provide enough relief.
McManamon & Co. has been providing accounting, tax, fraud, forensic and other consulting services to small and midsized businesses for years. And our tax services can be vital in a situation where you have to negotiate with the IRS. Specifically, we can provide you with an accurate assessment of what you actually owe and help you determine the best course of action going forward.
Again: It doesn’t pay to hide from the IRS. If your small business is in tax trouble, call us at 440.892.8900 or contact us online today.
Tags: McManamon & Co., small business, small business taxes, taxes | Posted in McManamon & Co., small business, small business taxes, taxes