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Taxes may be a certainty in business (and life!), but if cash flow is tight or business isn’t going as well as planned, you may not have enough money to pay your entire bill.
If this sounds familiar, don’t stick your head in the sand and ignore the situation. Falling behind on your tax payments can have serious consequences. Not only could you wind up paying more penalties and taxes than you need to, but you could also be putting your business and personal assets at risk.
By having a plan and taking action, you may be able to avoid or reduce the penalties, interest, and other consequences of unpaid taxes.
The consequences of not paying business taxes
If you can’t afford to pay your business taxes, you may wind up paying one or several penalties.
- There’s a failure to file penalty if you don’t submit your tax return by the filing deadline, or the extended deadline if you were granted an extension.
- A failure to pay penalty could apply if you don’t pay your taxes in full.
- If you haven’t been making estimated payments throughout the year, you may have to pay a failure to pay proper estimated tax penalty.
- The IRS could charge a penalty if your payment doesn’t go through, perhaps because you don’t have enough money in your account.
The penalty amount can vary depending on the penalty and circumstances. For example, you may have to pay up to 5 percent of your unpaid taxes if you don’t file a tax return, or 0.25 to 1 percent of your unpaid taxes if you file a return but don’t pay in full. The penalty could be charged each month, up until you meet a maximum time period or penalty amount.
Additionally, you may have to pay interest on your unpaid taxes and penalties, with interest accruing daily from the tax filing deadline until you’ve fully paid off your balance.
The interest rate can change each quarter, with announcements generally appearing on the IRS newsroom page. The interest rate is also higher for “large corporations,” which is defined as C corporations that have over $100,000 in unpaid taxes.
With a basic understanding of the penalties you could be facing, here are some suggestions for what to do if you can’t pay your business taxes on time.
1. File your tax return on time anyway.
You might feel tempted to put off filing a return until you have the money, but that could be a big mistake. “The first and most important thing is to file your tax return on a timely basis,” says Pat Raskob, a fee-only planner and president at Raskob Kambourian Financial Advisors. “You may get a late payment penalty, but you don’t pay as much as if you filed late.”
2. Pay what you can by the tax filing deadline.
Paying as much as you can when you file your return could also save you money.
“Make at least a partial payment with the tax return filing, and seek an affordable payment plan on the remaining balance,” says Michael Raanan, an enrolled agent and president of Landmark Tax Group. “The payment with the return will help reduce the tax amount, and therefore the related penalties and interest.”
Also, try to pay what you can by the original date — even if you get an extension. “All taxes are still due by the original filing due date, regardless of a filing extension,” says Raanan.
3. Review the IRS payment plans.
Ignoring your unpaid taxes could have serious consequences. So, whether you’ve made a partial payment or not, you’ll need to decide what to do next.
Applying for a payment plan could be one option. The IRS offers short-term and long-term payment plans to individuals, including sole proprietors, and long-term plans to individuals and businesses. A short-term plan is a payment plan that lasts 120 days or fewer, while long-term plans can last for over 120 days.
Depending on how much you owe, you may be able to apply for a payment plan online. There is a setup fee for long-term plans, which can vary depending on how you apply and whether you agree to make automatic payments.
Your payment amount can also vary depending on how much you owe. You may be able to choose the amount, although the IRS could require you make at least a minimum payment (determined by dividing your total amount due by 72 months). If you owe over $50,000, you may have to provide details about your current financial situation, such as bank and investment account balances.
While enrolling in a payment plan could lower your failure to pay penalty, interest will continue to accrue on your unpaid balance.
4. Try to defer your payments.
If you think you’ll be able to pay your taxes, just not right now, consider asking the IRS to temporarily delay its collection proceedings and put your account in Currently Not Collectible (CNC) status.
You can contact the IRS to see if you’re eligible for CNC status at any point. However, you may need to file past-due returns before qualifying, and filing this year’s return on time could help you avoid a penalty.
You may also need to share some financial information with the IRS, such as your income, assets, and expenses, to prove that paying your taxes will keep you from affording basic living expenses. If the IRS agrees, it may stop trying to collect your unpaid taxes and might delay issuing a tax levy until your financial situation improves.
If you qualify for CNC status, the IRS may review your finances each year to determine if you remain eligible. It may also charge penalties and interest during this period, and keep future tax refunds as partial payments on your debt. Your past-due amount, penalties, and interest may be written off if you remain in CNC status for 10 years.
5. Settle unpaid taxes with an offer in compromise.
If you can’t afford to pay your taxes in full, and you can’t afford a payment plan, you might qualify for an offer in compromise
“The IRS’s Offer in Compromise program allows a taxpayer to settle for less than the full amount owed if they meet strict IRS criteria,” says Ranaan. You’ll have to at least file a tax return, pay this year’s estimated taxes, and pay the current quarter’s federal tax deposits if your business has employees. Additionally, qualification can depend on your income, assets, expenses, and ability to pay.
You can use the pre-qualifier tool on the IRS’s website to see if you qualify for a preliminary settlement offer.
6. See if you qualify for lower penalties.
Have you tried to do everything by the book, but couldn’t due to extenuating circumstances? “The IRS can, in some cases, remove or reduce penalties for underpaying taxes if Reasonable Cause criteria or other tax law provisions are met,” says Ranaan.
For example, if you weren’t able to file a tax return or access your money due to a natural disaster or physical incapacitation, the IRS might accept those circumstances as reasonable causes. You’ll need to apply and send in proof, such as hospital records.
You could also qualify for first time penalty abatement if this is the first time you’ve been penalized, you filed your tax return, and you already paid or have a plan to pay your taxes.
While the IRS can’t directly remove the interest that’s already accrued, if a penalty is reduced or abated, the related interest amount may also decrease.
7. Consider a loan to pay your tax bill.
Borrowing money to pay taxes isn’t always a good idea, but it might make sense in some scenarios.
“If you can find a low interest rate from a family member, that might be a good idea,” says Raskob. It’s an option that’s worked for some of her clients in the past. Taking out a loan from a bank or online lender might also work, but consider the cost. “You need to figure out what the IRS’s interest rate is and compare it to what a lender offers,” she says.
“Ideally, a reasonable monthly installment agreement allows business owners to simultaneously stay in business while keeping the IRS at bay,” says Raanan. “That said, a business owner may find it helpful in some situations to utilize a loan to either reduce or fully pay a tax debt for strategic reasons, such as to prevent a tax lien or asset seizure.”
8. Seek professional advice.
“The best way to pay off taxes always depends on the specific facts and circumstances of a particular case,” says Raanan. “After a return is filed, business owners should immediately seek help in determining how best to address the remaining balance.”
Even if you think you know what you should do, taxes can be complicated, and having a professional on your side could be a worthwhile investment in your business’ future.
Funding Circle believes informed consumers are better consumers. We strive to provide informative and educational content useful for you and your business. However, please note that tax laws and regulations are complex and subject to change. We strongly recommend consulting your financial or tax professional regarding your specific circumstances.