What to Do If You’re Behind on Your Taxes

Steps to take if you’re behind on your taxes

If you’re behind on your business taxes or payroll taxes, you must take immediate action to minimize the financial impact on you and your company. Business.com spoke with certified public accountants (CPA) and tax experts to find out the best ways to handle the situation. Follow these steps to get started.

1. Consider consulting a tax professional. 

Not every letter from the IRS merits hiring a tax lawyer or other professional. You can probably deal on your own with a minor problem or a question you can respond to with a letter. But the more you have at stake and the more complex the issues, the more likely it is that you need to hire a tax professional to represent you. 

“I was comfortable representing myself in traffic court to fight a speeding ticket; I was not comfortable representing myself when I had to give testimony to the SEC regarding a past client’s questionable dealings,” said Logan Allec, CPA and founder of Choice Tax Relief.

If you don’t fully understand the tax issues at hand, you’re not sure you’re in compliance or you are in serious tax trouble, consider getting professional help. “You may want to at least consult with a CPA specializing in tax resolution,” said Rachel Gillilan, CPA and manager of fraud and forensic services at Red Bike Advisors. 

“A tax resolution specialist will be able to determine the best strategy to resolve the back tax issue,” she said. Gillilan recommended business owners work with a trusted CPA before the IRS starts levying bank accounts and shutting down their businesses.

Tax professionals can also help you stay out of trouble in the future. Business owners tend to fall behind on taxes for a simple reason: They think they can’t afford to pay the amount they owe. If taxes are yet another unmanageable business expense, you have more significant issues that must be addressed to improve your business’s cash flow. 

>> Read Related Article: Is It Time to Hire a CPA?

2. Communicate with the IRS.

IRS notices in the mail can seem harsh and intimidating. They often talk about frightening numbers and threats of additional fines or other consequences. If you already had trouble paying the original owed amount, it can be overwhelming to be presented with mounting costs. The amount billed, however, doesn’t necessarily reflect what you ultimately must pay. If you demonstrate a willingness to work with the IRS, you’re already on the path to reducing what you owe. You may even be able to negotiate your debt down to the original owed amount.

It may seem like a faceless monolith, but the IRS is composed of people trying to do their jobs but who face considerable resistance daily. You may feel you’re at their mercy, but they face their own obstacles as they attempt to collect unpaid taxes. With that in mind, IRS officials appreciate it when business owners are cooperative and communicative and often respond in kind.

Respond to any requests for information from IRS agents as soon as possible ― especially if you’ve been ignoring them before this ― and be transparent about your situation. You may not want to acknowledge openly that you owe the agency money, but they are probably well aware of what you owe. IRS agents investigate when necessary — namely when they need further information and you don’t provide it. If an investigation is the only way they can contact you successfully, they won’t look upon you favorably.

3. Make sure you actually owe the amount claimed.

The IRS sometimes makes mistakes or receives erroneous information. It has been known to count income from a Form 1099-MISC twice, for example. Or you could have an easily fixable mistake on your tax return, such as forgetting to click one box and, therefore, not appearing to qualify for a deduction. Look carefully at your return for the period in question, and consult with a tax professional if the amount in question is substantial or if the letter is wholly unexpected. 

“The IRS has been making lots of mistakes lately, and we have seen taxes or penalties that are not legitimate and are corrected with a couple calls and letters to the IRS,” said Crystal Stranger, CEO of Optic Tax.

If your tax bill includes penalties, you can try writing a letter to ask for an abatement of penalties due to circumstances, such as ill health, not being aware of tax problems or some other reason. The IRS can be surprisingly cooperative, especially if you have not asked for an abatement before. If the penalty is removed, it also removes interest that has accrued thus far on that penalty.

4. Investigate available options to pay your tax bill.

Paying down your tax bill is your goal, so evaluating your options is crucial. Consider the following payment methods.

• Use business or personal assets to pay the bill. The best way to put a tax bill behind you without paying interest or other fees is to find the resources to pay it off. Consider using personal or business savings or investments, selling assets such as extra vehicles, or cutting back on business and personal spending until the tax bill is paid. Be careful not to jeopardize your ability to keep up with current taxes and other bills.
• Take out a loan to pay your tax bill. To avoid IRS interest and penalties, consider applying for a business loan or personal loan. Getting a loan instead of signing up for the IRS’s installment payment plan (learn about that option below) can give you more flexibility, especially if you don’t meet the agency’s installment plan qualifications. Compare the interest rate on a potential loan with the current underpayment interest rate charged by the IRS. 
• Pay your tax bill with a credit card. Using your business credit card to pay your taxes may seem like a quick fix, but it has two disadvantages. First, you’ll pay extra fees to use a credit card for tax payments, and the fees will outweigh any cash back or other rewards on your card. Second, credit card interest can be high — much higher than on a bank loan or a balance due with the IRS. Using a credit card to catch up on taxes should be a last resort, preferably only to be used if you know you can pay off the credit card bill in a short period of time.
• Borrow from your 401(k) to pay your tax bill. Using your 401(k) to pay your tax bill should also be a last resort. Some 401(k) retirement plans allow you to take out loans against up to 50 percent of the account balance. There is a maximum amount you can borrow — $50,000 — and you’ll be required to repay the loan on schedule within five years or face hefty penalties and tax consequences. If you’re younger than age 59 1/2, you must pay a 10 percent early distribution penalty, and any untaxed amount you borrow is treated as taxable income. The retirement plan provider charges you interest on the amount borrowed in addition to a loan-processing fee.
• Ask for a short-term extension. The IRS is in the business of collecting money, not being punitive. Accordingly, it provides options to make payment feasible for people and businesses in difficult situations. Extensions are one such option. Consider asking for a short-term extension if you anticipate getting the money to pay your taxes soon. A short-term extension will give you up to 120 days (roughly four months) to collect the money to pay your tax bill. Even if you’re granted that option, however, you’ll accrue interest until you pay your bill in full. Still, extra time will relieve some of the stress of being on the wrong side of the IRS. Interest will generally be the short-term federal rate plus 3 percent, and it may fluctuate quarterly. There may also be a monthly penalty on the unpaid balance. 
• Set up a payment plan for your tax bill. If you know you won’t be able to pay your bill within six months, consider seeking an installment agreement ― an IRS-approved payment plan. You won’t incur additional penalties if you make those payments on time, but an installment agreement does have processing fees and still carries interest. You can choose a short-term payment plan, which is 180 days or less, or a long-term plan. For the short-term payment plan, you must owe less than $100,000, including taxes, penalties and interest. For a long-term plan, you must owe $50,000 or less and have all required tax returns filed. Visit the IRS online payment agreement web page to investigate this option.
• Explore an offer in compromise to handle your tax bill. If an installment agreement isn’t feasible and you can demonstrate that paying the amount you owe would legitimately endanger your business, you may qualify for an offer in compromise ― an agreement to settle your debt for less than the amount owed. Visit the IRS’s offer in compromise web page to explore this option. An offer in compromise is similar to a personal or business bankruptcy and should be used only when you have run out of other options. An offer in compromise may not be a good choice if you have significant business or personal assets, including a house, vehicles or other assets, because the IRS may consider those assets when deciding how much you can pay to settle your debt.
• Explore currently not collectible (CNC) status to deal with your tax bill. You can also consider demonstrating that you’re in CNC status. With this option, you must prove that you have no money now and are not expecting money in the near future to pay your taxes. If the IRS approves this option, it will delay tax collection until it determines you can afford it. The agency will review your finances every year to monitor your progress. If you owe more than $10,000, the IRS will likely file a tax lien on you as a matter of public record. Any future tax refunds will apply to your back taxes. Visit the IRS’s web page about CNC status online to learn more.

5. Make a plan to address your tax bill.

After weighing all your options, it’s time to choose a plan to address your tax bill. It’s best to communicate immediately with the IRS and pay what you can. Interest and penalties are calculated based on the remaining unpaid tax amount, so you can reduce meaningfully the total amount you have to pay, even if you seem to be only chipping away at it.

What it means to be past due on your taxes

Being past due on your taxes means you owe the IRS an unpaid balance, called the principal. Just as you may charge clients late fees and interest due to outstanding bills, these penalties will be added to the principal you owe the IRS, accruing until you pay off the total balance. That is why you want to address past-due balances as soon as possible ― they only get worse as time goes on.

Keep in mind that filing an extension doesn’t extend the time you have to pay the balance on your taxes. The amount will accrue penalties and interest as of the original tax filing deadline.

Read Next: How to Hire the Right Accountant for Your Business

How small businesses get behind on their taxes

According to the experts we spoke with, small businesses typically get behind on their taxes for the following reasons.

• Failing to remit payroll taxes to the IRS and the state: Employers must withhold tax from employees’ pay and remit it on time, along with additional payroll taxes paid by the employer. “Even for a small business with less than, say, 10 employees, these amounts can add up to tens of thousands of dollars per month,” Allec said. “And if a small business is experiencing cash flow issues, it can be very tempting to simply hold on to this cash rather than remitting it to the government.” Very soon, the unpaid payroll tax liability is out of control. “A small business can see their unpaid payroll tax liability snowball from a few thousand dollars to a few hundred thousand dollars to even a few million dollars over the span of a few years.”
• Failing to set aside money for quarterly estimated tax payments. For very small businesses, the self-employment tax of 15.3 percent of net business income can sometimes be a heavier burden than business or individual income taxes. 
• Not understanding tax obligations until the year is over. “Many businesses don’t realize their tax positions until year end, and then are surprised to owe tax,” Stranger said. She finds that one area where unexpected tax has been triggered recently is Section 174 R&D amortization related to new products. “Many startups don’t realize they have to amortize these activities and then are surprised that even though they have a net loss from a cash flow position, they can still end up showing a profit for tax purposes and have to pay tax.”

How filing taxes late can impact your business

Tax delinquency has costly and altogether unpleasant consequences, and those consequences only become worse with continued neglect. Not filing your taxes on time triggers the IRS collection process. “You will likely start receiving IRS notices in the mail,” Gillilan said. “Usually, the IRS is required to send several notices before they take a collection action, such as levying bank accounts or closing your business.” If you ignore IRS communications, your business may be impacted by the following consequences.

• Levies: When there are levies against your business, the IRS can seize company property. The easiest property for them to seize is your bank account. It can be impossible for you to make payroll and pay other bills if your business account is levied.
• Liens: When the IRS files a lien, it has an ownership claim on your company’s assets until you pay off your debt. 
• Inability to borrow: Liens and levies show up on your credit report, hurting your company’s ability to borrow funds or finance purchases.
• Fees: You may incur fees, including penalties, interest and surcharges, for each month the taxes go unpaid, further damaging your business’s finances.

Jennifer Dublino contributed to this article.