4 Consequences of Unpaid Business Taxes

Tax Calculation

Millions of dollars in penalties are doled out by the Internal Revenue Service (IRS) each year. With the majority of which are attributed to businesses that failed to file taxes or pay payroll taxes. It’s important to understand compliance to ensure your company steers clear of costly violations. 

There are unforeseen circumstances that could trigger an IRS penalty to your business, as well as instances like borrowing against payroll taxes owed to make up a payroll or service debt and missed deadlines.

Not paying business taxes will cause serious consequences for your business. Read on to learn about the many penalties that could happen to you and your business if you don’t pay your business taxes.

IRS Notices

If you don’t pay your business taxes on time, the IRS will send a notice in the mail with an outline of a due date (typically 30 to 60 days) for you to respond to the notice. Ignoring these warnings could result in additional penalties, fees, or even a knock on your door from an IRS agent.

Do these steps if you receive a letter from IRS  

  • Read the letter in its entirety for details and specific instructions. 
  • Retain a copy of your letter or notice in the event the documentation needs to be referenced later.
  • If you can, and if the amount due is correct, pay the IRS. If you are unable to pay the balance in full, IRS may offer options to apply for an online payment agreement or a compromise.
  • If you disagree with the notice or want to dispute the claim, contact a tax professional who can give you expert advice.

Do NOT do the following: 

  • Do not ignore or discard the notice
  • Do not miss an IRS deadline
  • Do not send IRS records they did not request (you may inadvertently expand the scope of your audit).
  • Do not hire a litigation or other attorney other than a qualified tax attorney (government audits are complex and highly specialized)

Late Penalties and Fees

If your company does not file taxes or does not pay the full amount, then you may be subject to a 10-15% penalty, which applies to every month the payment is delinquent, up to a maximum of 25%. An additional penalty of $135 and interest equal to the federal short-term rate plus an additional 3% may apply. Even paying late by one business week or less could result in your business incurring a 2% penalty.

Errors on tax returns found by IRS can result in an accuracy related penalty of 20% of the amount owed in total. They are charged post audit conclusion if you or your business were found guilty of failing to report income or proving small business tax deductions. You must pay interest on the penalty until it is paid in full. 

Federal Levies, Seizures and Tax Liens

The Federal Payment Levy Program enforces the right to suspend certain benefits from business owners, including Medicare provider and supplier payments, military retirement benefits, select federal salaries and certain individual earnings from Social Security.

One of the more impactful actions of the IRS is property seizure. In the case of unpaid business taxes, the IRS is permitted to levy the assets of businesses. If you fail to pay on time or pay in full, the IRS may seize company equipment, cars, and even your business property itself.

If you neglect your tax bill, the federal government may choose to place a tax lien or levy against your business. This means that the IRS is superior over your debtors in the event that you become insolvent. If you try to sell your assets, the IRS will collect the funds before you can receive them.

Criminal Charges

If the IRS determines that your business attempted to evade payment through fraudulent means, including filing false tax returns or falsifying deductions on those returns, not reporting cash receipts accurately, creating fraudulent invoices, and hiding income you may have criminal exposure. These actions are considered intentional acts, and should not be confused with unintentional neglect.

Willfully failing to pay taxes, considered tax evasion or tax fraud, is a considered a felony charge that is punishable by a fine of $10,000, five years in prison, or both. IRS created The Tax Crimes Handbook explaining details, fines and jail time associated with various tax crimes. These charges are often reserved for egregious cases where the business owner diverted money for personal use instead of taxes.

Some IRS, EDD or CSLB audits start with misclassification audits, payroll tax audits or Income tax audits and expand to criminal charges either because some insurance fraud comes to light in the form of worker’s compensation insurance fraud or other criminal fraud charge.  Having a qualified attorney communicate with the auditing agency is always the best choice as that attorney has attorney-client privilege and cannot have their records summonsed (unlike a CPA). 

Avoid These Penalties to Keep Your Business Safe

It is best practice to pay your business taxes on time to prevent any penalties or legal action from the IRS. If you do not have money to pay the entire amount, paying at least a part of the deposit could reduce the amount of penalties owed. Here are some resources to get started.

There are benefits to hiring a professional tax attorney. They can explain to you the options you have in greater detail, like installment plans and extensions. Talk to our professionals at Milikowsky Tax Law about how to manage your unpaid business taxes.