What To Do If Your Business Can’t Pay Its Taxes
Every year, numerous small businesses find themselves in a stressful situation:
They’re late on their taxes.
It can happen for any number of reasons: economic downturns; financial strains such as cash flow issues or unexpected expenses; poor tax planning; unexpectedly high taxes after a bumper year; even just shoddy record keeping.
Whatever the reason, we’ll tell you the same thing we would tell individual taxpayers who find themselves in a similar situation: Don’t ghost the IRS.
Read on as we discuss why you should be upfront with tax officials if you’re late on your small business tax payments (and/or your tax filing), and a few of the steps you should take to remedy your situation.
It’s Better to Face the Music Right Away
“Maybe the IRS won’t notice,” you say to yourself. “We’re a small business; they have much bigger fish to fry.”
It’s a calming thought, to be sure, but it’s a poor gamble with considerable consequences.
Let’s say you just realized you didn’t file your return. You just put your head down and hope no one will miss it. Unfortunately, you still owe whatever your obligation would’ve been. You’ll also owe an additional 5% failure-to-file penalty on top of your tax debt each month, up to a maximum of 25% if your filing is late enough.
If you simply don’t pay your business taxes, you’ll both owe the original amount plus 0.5% per month, again up to a maximum of 25%. If you don’t file and don’t pay your taxes, your failure-to-file penalty will be reduced to 4.5%, but combined with the failure-to-pay penalty, it will still add up to 5%.
Of course, some businesses try to wriggle out of their situation in an even more hazardous way.
Let’s say you lie to the IRS and fudge your numbers to convince the IRS you actually don’t owe so much. If you’re caught, you’re at best looking at a negligence penalty — levied for failing to make a good-faith effort to properly state your income or calculate your deductions. Negligence penalties are 20% of the understated amount.
If the IRS is more convinced that you were acting fraudulently than making a simple mistake, you could be slapped with civil fraud, which is 75%.
The worst outcome — one in which the IRS actually has evidence that you’ve committed fraud — is that they also charge you with tax evasion. Not only could you face a maximum fine of $100,000, but you could even face up to five years in prison.
What to Do If Your Business Can’t Pay Its Taxes
Rather than hide or lie your way out of your situation, remain calm and follow these steps.
- Assess your financial situation, then determine what you can do to prioritize your tax payments.
- Keep the IRS in the loop about your situation. Contrary to popular belief, the IRS isn’t looking to put the hammer down on delinquent filers. Individual taxpayers can qualify for short-term payment plans (120 days or less, amount owed is less than $100,000) long-term payment plans (more than 120 days, amount owed is less than $50,000), or apply for an “offer in compromise” to settle for less than they owe. Businesses can receive similar concessions, though offers in compromise are uncommon for businesses. Businesses might also qualify for a temporary delay of the collection process.
- Evaluate your financial management practices. This might be less necessary if you’re simply a victim of bad fortune — a severe economic downturn, a natural disaster strikes, and so on. But in most situations, it makes sense to step back and try to determine what factors led to your inability to take taxes. Where you can, take steps to address them so you can prevent future failures to pay.
One More Step You Should Take? Talk to a Tax Pro!
Navigating the complexities of tax law can be challenging, especially when dealing with financial difficulties. Hiring a tax professional, such as a Certified Public Accountant (CPA) or tax attorney, can provide invaluable assistance. They can negotiate with the IRS on your behalf, help you understand your options, and ensure that you comply with all legal requirements.
McManamon & Co. provides accounting, tax, fraud, forensic and other consulting services to small and midsize businesses. Among our various tax services is assessing your late payment situation and helping you plot out the best course to deal with the IRS. And most importantly: We can work with you to help ensure late filings and payments don’t happen again.
Remember: It doesn’t pay to hide from the IRS. If you’re worried about your small business’s tax situation, or you just want an experienced hand to guide you through all things taxes going forward, call us at 440.892.8900 or contact us online.
Tags: accounting, IRS, IRS audit, small business, small business accounting, small business taxes, taxes | Posted in McManamon & Co., small business, small business taxes, taxes