Back taxes occur when business or personal taxes are not filed and paid in full by their due date each year. They continue to accrue interest for as long as they remain unpaid, and many can incur a number of additional penalties as well.
Here are some of the serious and often severe consequences your business may encounter if you fail to remedy back taxes owed to the IRS.
Regardless of whether or not you can pay immediately, you should at least file your taxes. The failure-to-file penalty can be as much as ten times greater than the penalty for simply not paying. Often, this penalty is 5 percent of the unpaid taxes for each month that your tax return is late (not to exceed 25% of your unpaid taxes). The penalty can add up quickly, which is why tax professionals strongly recommend filing on time, no matter whether you can afford to pay the actual taxes you owe.
The IRS uses their Information Returns Processing (IRP) system, which automatically flags those who do not file for follow up. The IRP also provides an assessment of what you owe. It likely will not take into account any deductions or other measures you might use to reduce your tax exposure, meaning that the IRS tax bill it generates is likely going to be greater than one presented by an accountant.
In other words, if you don’t file your taxes on time you will face not only a failure-to-file penalty but a higher overall tax bill, as well — that’s not to mention the interest which will also accrue on your tax debt.
One of the more common reasons businesses incur back taxes is due to economic downturn. In this situation, it’s not uncommon for businesses to pay off their vendors instead of paying taxes, or to suppress withholdings for payroll taxes from the IRS.
If you didn’t pay your taxes by the due date, you’ll face the failure-to-pay penalty on top of your back taxes. (If you also incurred the failure-to-file penalty, both penalties will apply.) Generally, the failure-to-pay penalty will be 0.5 percent of your unpaid taxes per month. This penalty begins accruing immediately — the day after taxes are due — and continues to apply for every month (or partial month) your taxes remain unpaid (not to exceed 25% of your unpaid taxes).
While there are extreme scenarios in which a business won’t be subject to back taxes or penalties — such as natural disasters, a death in the family, or Innocent Spouse Relief — these are rare occurrences. More likely, your best option will be to work with an experienced tax attorney to resolve your back taxes, interest, and associated penalties as soon as possible.
If your company is subject to back taxes, the IRS is permitted to withhold any future tax refunds you and your business are entitled to receive until those taxes are paid off. If you are self-employed you may also find your retirement savings affected; this is because, during the period of unpaid back taxes, your income is not being reported to the Social Security Administration. In this situation, you’ll likely find it harder to receive future loans or financing for your business, particularly if the IRS has placed a lien on your business.
The IRS may also seize your assets in order to pay the outstanding balance your business owes. They also have the authority to levy or lien personal assets of the business owner and any other responsible party. In more extreme cases, the IRS can shutter your business and seize your property without warning — no court order required.
How to Respond to the IRS
Tax payments simply cannot be avoided. The statute of limitations for pursuing tax debt is a lengthy ten years, and most people cannot avoid the IRS’ long financial reach for a decade or longer. To avoid the harsh repercussions of back taxes, do not put off or ignore the IRS’ demands, even if you have not been personally visited by an agent.
Contact the IRS immediately to ask for an extension, set up an installment plan, apply for an offer in compromise, or even request a temporary halt to the collection process. If none of these options fit your current situation, simply calling to acknowledge that you’ve received the collections notification will show good faith and work in your favor.
Once you’ve made contact with the IRS, begin making adjustments to lender and supplier payments as well as other expenditures in order to find the money to pay your tax bill. Working with a professional tax attorney can help you communicate with the IRS in the smoothest way possible. For the best approach tailored to your unique financial situation, contact the tax attorneys at Milikowsky Tax Law to discuss your options for resolving your tax debt.