Tax time takes on an all-new meaning once you’re a business owner. Even if your business is a solo venture, you’ll be tasked with paying a percentage of everything you earn to the IRS. At that point, tax time goes from wondering how much your refund will be to sweating over how much you’ll owe.
Even if you pay estimated taxes on a regular basis, you’ll likely owe money at the end of the tax year. If you have an amount due at the end of the year, it’s probably a sign your business is growing faster than your tax preparer estimated the previous year. But coming up with thousands of dollars in due taxes and penalties can be tough, even for the most successful organization. Here are a few things you can do if you owe the IRS more than you can pay.
Don’t Ignore It
When you owe money to the IRS, it can be tempting to put off dealing with it. Unfortunately, pretending it doesn’t exist won’t make it go away. The IRS may not be the quickest to come after you for payment, but they’ll eventually catch up with you. They’ll start with bills and phone calls, giving you a chance to pay the overdue amount to avoid further action. However, that overdue amount will quickly begin to grow, thanks to the IRS’s hefty penalties. Eventually, they’ll seize assets and property to collect on the amount you owe, including the business you’ve worked so hard to build.
Instead of ignoring the IRS, speak to them directly. They’re willing to work with you and will be much more amenable to helping you if you’re communicating with them about the issue. A list of IRS numbers is available on the agency website, helping connect you with specialists in business taxes who can help with your situation.
Ask for a Payment Plan
One of the best things you can do from the start is to ask for a payment plan. This will allow you to send in regular payments, satisfying the IRS and, most importantly, keeping them off your case. The IRS often allows taxpayers to pay monthly payments on past-due taxes and paying in installments will put you in the right direction toward paying it off completely.
Be aware, however, that you’ll still accrue penalties during this time. You’ll also be responsible for paying taxes on the new money you’re earning each year. If you can find a way to pay the past-due taxes as quickly as possible, you’ll decrease that burden. You may have to raise your rates to give your business the extra money it needs to swing extra tax payments.
Negotiate a Discount
Many taxpayers aren’t aware of it, but the IRS does sometimes agree to a discount on taxes due when requested. Called an “Offer in Compromise,” this process involves working directly with the IRS to negotiate down the amount due. A business may offer assets to help pay off the debt or set up a plan to pay the amount off once the IRS agrees to an amount.
To qualify for an Offer in Compromise, a business must show that paying off the debt will create an economic hardship for its owner or the business as a whole. The IRS is most likely to approve an Offer in Compromise if the amount the taxpayer will remit is similar to the amount the agency could expect to collect within a reasonable timeframe. Businesses will be asked to detail all assets as part of the application process. If a company is currently in bankruptcy, the IRS will not negotiate to reduce the amount due.
Don’t Fear the IRS
While it’s important to pay your taxes in order to avoid penalties, it’s also important to avoid feeling intimidated by the IRS. The agency is dealing with a large number of taxpayers who owe money and procedures have been put in place to get results. This often can involve intimidation tactics similar to those used by debt collectors. As frightening as those tactics can be, if you remain calm and strategize a way to minimize the damage to your business, you can make it through the situation without unnecessary stress.
The important thing is to realize the IRS is approachable. If you have concerns, call them and speak to someone who can give you your options. Your tax preparer may be able to help you set up something with the IRS. Most importantly, avoid signing up with professionals who promise to work with the IRS for a fee. Those professionals have no more leverage with the IRS than you do and their fees will only make a bad situation worse.
The more your business earns, the more taxes you’ll be forced to pay. By always setting aside a portion of your revenue for taxes and paying them throughout the year, you’ll be able to keep yourself from getting in a situation where you owe more than you can afford. However, when you do find yourself in hot water with the IRS, communicating with someone at the agency is always the best way to come to a resolution.
