Small businesses with tax debts face the daunting powers of the IRS and the various methods that the agency can use to collect overdue taxes -- many of which could spell the end for your business. But, luckily, most small businesses that are behind in taxes can work something out with the IRS -- provided they know the ins and outs of dealing with this formidable collection machine. If you owe the IRS money, keep the following in mind.
If you're behind on taxes and want to stay in business, one crucial thing to remember is that you need to keep in touch with the IRS. The agency might leave you alone for a while, but you can bank on the IRS coming back around again -- probably at a most inopportune time. Try ignoring the IRS and the consequences can be dire -- penalties and interest increase, and you may even lose your business.
Penalties and interest. The longer you ignore your business's tax problems, the larger your tax debt will grow. Currently, most tax debts compound at a rate up to 14%. Unless you are out of business, flat broke, or unemployed and likely to remain that way, IRS tax collectors will be hovering.
IRS collection powers. Congress has given the IRS enormous legal powers to collect past due taxes. The IRS can seize just about anything that you own -- including your bank account, home, and wages. And the IRS doesn't need a court order or judgment before closing your business and grabbing your property. In most cases, the IRS only has to send you a form "demand letter" before it acts -- and, in special cases, it isn't compelled to give you any warning at all. The IRS can effectively close down your operation by seizing your assets -- business accounts, desks, inventory -- and padlocking your doors.
On the plus side, the IRS collection machine is slow to get started -- and slow to react once things get rolling -- which gives you time to strategize. You'll probably get a raft of computerized tax bills, and maybe IRS telephone calls, early on. But it might be months or even several years before you have to confront the IRS face-to-face. With limited personnel, the IRS tries everything else before assigning a real person to your case.
Don't get too comfortable, though, just because no one knocks on your door. Every year the computerized IRS collection system gets faster. Computer-generated tax liens and levies can make your life every bit as miserable as human collectors can.
In most cases, you should be cooperative and provide any financial information that an IRS collector asks for. However, full disclosure may not be a good idea. Never lie to the IRS, but you aren't legally required to disclose anything about your finances or assets to the IRS collector unless you are formally served with a summons.
The IRS often threatens to shut businesses down, but that threat seldom becomes a reality. In the few instances that IRS action does close a business, it is usually because of unpaid payroll taxes. This should be comforting to know when you are trying to work your tax debt out with the IRS.
If it would help your situation, consider asking the IRS for a payment plan. The IRS allows most tax debtors to pay off old tax bills in monthly installments. But, if you go this route, remember that interest and penalties are always accumulating. You can also try to negotiate a discount on the total amount you owe.
About one in four businesses can make a deal with the IRS to settle a tax bill for pennies on the dollar through the offer in compromise process. Requesting an offer in compromise is a lengthy, formal process in which the business fills out an IRS form, provides detailed information about its precarious financial situation, and requests that the IRS accept only a portion of what the business owes.
If the IRS believes that it is unlikely to collect more in the future -- so that accepting less now is in its best interest -- it will likely accept your offer in compromise. For more information, see Nolo's article Using an Offer in Compromise to Settle a Tax Bill.
If your business's financial situation is truly dire, you can request to be temporarily placed on "uncollectible" status. If the IRS agrees, it will leave you alone for a certain period of time. You will still owe the tax and penalties (and interest will accumulate), but the IRS will not engage in collection efforts against you during this time.
Regardless of what the IRS may tell you, filing for bankruptcy can reduce or wipe out some tax debts. The rules are complicated, but the bankruptcy option is worth checking out as a last resort. (To learn more about bankruptcy, see Nolo's Bankruptcy section.)
For all the tips and strategies you need to deal with the IRS, including how to work out a payment plan and fill out an offer in compromise, get Stand Up to the IRS, by Frederick W. Daily (Nolo).