Whether you’re in charge of a major corporation or a small business, you’ll want to plan ahead of time for Tax Day. However, when juggling all of your business’s moving elements, things don’t always go as planned. The rush and pressure of getting everything done may leave you exhausted.
Unfortunately, this can be the ideal recipe for missing tax filing deadlines and owing to the IRS money. And the Internal Revenue Service (IRS) won’t hesitate to send you an invoice. So, please take a few moments to acknowledge that it’s a situation that both you and the federal government want resolved with immediate effect.
When you fail to pay and file your business taxes before the deadline, you’ll owe back taxes. For a small business, back taxes can have significant repercussions. Read on to learn what happens to you and your business if you don’t pay your business taxes.
Consequences of owing business back taxes
If you file on a calendar year-basis and your tax year ends on the 31st of December, your federal income tax return is due every year on the 15th of April. But, if the due date falls on a weekend or a legal holiday, it is moved to the next business day.
When your business owes the IRS money, a chain of consequences follows you around until you pay the debt. Here are a few problems you’re likely to face if your business owes back taxes.
- Penalties and interests arise– Interest and penalties can quickly mount if your taxes are past due. For instance, if you file your return more than 60 days after the due date, the IRS can charge you a minimum penalty of $205 and a maximum penalty of 25% of the tax owed, plus interest. That’s just the late filing penalty. Late payment penalties can range from 0.5 percent to 25% of the unpaid taxes per month, while the interest is 5% annually. However, there is some good news. The penalty rate reduces to 0.25 percent each month once you set up a payment agreement with the IRS.
- Possible damage to your tax refund– Many people are unconcerned about filing tax returns because they are confident that they have overpaid their taxes. On the other hand, the IRS will not allow you to claim a refund constantly. In most cases, the IRS will consider your overpaid taxes a “contribution” to the US Treasury and refuse to give a refund after three years.
- Possible foreclosure of your property– The IRS will send you a notice as soon as your taxes are past due, and if you don’t pay, the IRS may place a tax lien on your property.
- Possible nullification of your passport– The IRS added a new tax-collection tool to its arsenal. The IRS can brand you a “seriously delinquent” taxpayer if you owe more than $53,000 or if the IRS has attempted to collect from you before, but you are not in a payment agreement or other arrangement with the IRS. If this happens, the State Department has the authority to revoke your passport.
- You could go to jail: Obviously, this is the most severe circumstance, and it doesn’t happen as frequently as news shows and criminal dramas would have us believe. However, deliberately dismissing IRS notices or dodging your tax responsibilities may result in your arrest.
Remember that if you have a good reason for filing and paying your taxes late, the IRS will not penalize you. The circumstances and facts surrounding your case determine your reasonable cause. IRS will examine any reason that shows you tried everything you could to meet your federal tax responsibilities but still couldn’t.
Good reasons, if established, include; fire, accidents, natural disasters, and other calamities. Another reasonable cause is death, serious illness, or incapacitation of the taxpayer or a member of the taxpayer’s immediate family.
If you ignore filing past due business taxes, you may face legal consequences as well as financial consequences. Failure to file past due taxes could invalidate you from getting a business or personal loan.
What should you do if your business owes back taxes?
You might not only have brushed right past the tax filing deadline but also owe more on your tax return than you can repay. The good news is there are several ways to manage the damage. Here are the most common ways;
- Petition for an extension: If you request an extension, you and your tax preparer will have until the fall to file your return, rather than March or April. Now, this will not decrease your tax burden or prevent interest or penalties from accumulating, but it will offer you extra time to complete your return.
- Please respond to all IRS notices as soon as possible: It’s essential to respond to any IRS letters you get through email or ordinary mail as quickly as possible. Even if you can’t pay your taxes, it’s essential to maintain contact with the Internal Revenue Service.
- Consider a payment plan: If you can’t pay your entire tax debt right away, the IRS will work with you to establish a short-term or long-term payment plan. Businesses that meet the criteria can set up an online payment plan. Alternatively, you could benefit from a compromise offer. If you demonstrate an inability to pay, this settles your tax bill for a lower amount than you owe.
- Request currently not collectible status: If the IRS determines that you cannot fund reasonable living expenses while still paying your taxes, they may temporarily place your account in “currently not receivable” status. Although you will continue to owe the tax and accrue penalties and interest, the IRS will not pursue collection action against you during this time. Every year, the IRS will assess your financial condition and expect you to pay when you are able.
- Get a CPA or tax attorney: If you owe a considerable sum in back taxes, it is wise to hire a CPA or tax attorney with experience in tax debt settlement.
- Consider bankruptcy: Declaring bankruptcy on your business is not something you should take lightly, but it can be the last choice for business owners who owe a lot of unpaid taxes.
Note; you should file an amended tax return if you filed your tax return on time and discovered that you made a mistake.
What are the steps for filing and paying back taxes for a business?
Don’t worry if you missed your tax deadline: the IRS has simplified the process of filing back taxes. Unlike in the old gold days, where you had to fill the forms on paper, you can now electronically file your 1040 taxes for the previous two tax years, thanks to the launch of Modernized e-File.
You’ll need to complete paper forms if you need to date back more than two years or file past due taxes that you didn’t report on Form 1040. Corporations, partnerships, and multi-member LLCs typically use separate small-business tax filings.
You must use the authentic forms for the tax years you submit in this scenario. In other words, you can’t try to file last year’s taxes using this year’s tax preparation software or this year’s tax return. That could cause issues with the current year’s return, and it’s almost a guarantee that you’ll have to resubmit the past-due tax return.
To file your back taxes, ensure you have the proper documentation.
You could have trouble locating your tax records if you’re more than a year or two behind on your filings. If your business happens to be your only source of revenue, you’ll need to catch up on your bookkeeping to finish your previous year’s filings accurately.
It means you’ll have to begin from scratch with your bank accounts and credit card statements. Banks and credit card firms are improving their online access to previous records. Still, you may have to request statements if you use a smaller bank (especially local ones, which don’t always have extensive online banking capabilities).
You’ll need the W-2s for each tax year if you had income from a W-2 job or if your spouse was employed. You could request a copy of the prior year’s W-2s from your workplace — or your spouse’s employment. Businesses must keep these records for at least four years, but many employers keep them longer.
The foremost step should be to request a copy of your W-2s from your employer. It’s also applicable if you were a 1099 payee. Request a copy of your 1099 from the company that paid you. They should have a copy if they paid you $600 or more for the year.
You can seek a copy from the IRS if you can’t acquire a copy of your W-2 or 1099 from the payer, who is unreachable or because you owe past taxes that the record-keeping standards don’t cover. There is also an option to obtain a copy via the internet.
Keep in mind that IRS transcripts only provide information on federal taxes. If you live in a state that needs you to file a state or local tax return, you’ll need to contact the appropriate tax authorities and inquire about transcripts.
Pay your business back taxes beforehand applying for a business loan
Before asking for a company loan, it’s exceptionally crucial to pay your outstanding taxes. Most lenders require your most recent tax return to submit a business loan application. Some lenders require several years’ worth of tax returns due to several factors:
- Income verification: Some business owners may be inclined to overstate their income estimates to get a loan. However, it’s different when it comes to submitting tax returns. Potential lenders will use your business’ tax records to verify the income you claim on your loan application.
- Trends in profitability: Lenders want to see a track record of profitability, especially if you’re seeking a long-term loan. As a result, many lenders may request three years of tax records. Having a track record of success boosts your chances of securing a low-interest loan.
- Trustworthiness and accountability: While timely filing and paying your taxes has no impact on your credit score, failure to file past due taxes can suggest a lack of responsibility and trustworthiness. These two factors may affect a lender’s decision on your loan.
Your lender will inquire for a copy of your company’s financial statements, but this does not nullify your loan application’s need to provide tax returns. Your tax return does not replace a meticulously kept set of books, but it is frequently the “last word” on a company’s assets and liabilities.
Not every company has a bookkeeper who enters the tax preparer’s modifications into the accounting software. Your lender will be mindful of this and will want to look over your tax return to get a picture of your company’s assets and liabilities.
The lender’s unique requirements will determine your eligibility for a business loan if you have an outstanding tax lien against your company or are already on an IRS payment plan. Some lenders are unconcerned if a tax lien is less than a specific amount, while others demand you to settle a tax lien before applying.
Is it harmful to owe back taxes on your personal return?
Some business owners are cautious about their company’s finances, but their personal finances are far less so. Most lenders examine the personal finances of anyone who owns 20% or more of a firm, depending on the kind of loan requested and the entity structure of the business seeking the loan.
The lender may even seek a personal guarantee of the loan, which means that if the company defaults, the owners or shareholders may be held liable for repayment. As a result, owing back taxes personally might be harmful to your business’s ability to raise capital.
Your lender will likely require your personal tax records to establish if you will be a viable guarantor of the loan, just as they will likely request your business tax returns to determine the business’s ability to repay the loan. As a result, before applying for a company loan, you should file any outstanding personal tax returns. If you have a business partner, ask them to file their tax returns before requesting a loan.