Paying taxes is part of life for both individuals and businesses, regardless of size, scope, or tax bracket. Small business owners know that it’s crucial to file their company’s tax returns on time each year, accompanied by a check for the amount that they owe the IRS. The downside comes when the amount due is more than the cash on hand. Whether the business suffered due to a lack of sales, ran into some bad luck during the year, or wound up spending more than budgeted on a new location or series of products, if they simply don’t have enough liquid funds to meet their obligations to the IRS, there could be serious consequences. So, what happens if you don’t pay your taxes? Unfortunately, the IRS is very experienced in this realm and has a number of highly effective ways to make small businesses (and those who run them) pay taxes that are due.
They’ll Charge You Penalties and Interest
If your small business doesn’t pay its taxes on time, then you’ll be charged penalties and interest by the IRS. Starting the day after your filing deadline, even if you submit your return without an accompanying check, the IRS begins charging you interest. Not filing at all – missing the deadline altogether – can greatly add to the amount of penalties that they’ll levy, so it’s essential to make sure to at least get that return filed on time.
The interest rate charged varies quite a bit and ranges based on the federal short-term rate. The IRS adds 3% onto this rate, sometimes raising it considerably and making it more expensive to pay off the amount owed over time. The interest begins accruing the day after the money is initially due and continues until the entire debt is paid off. This can add up quickly, especially if you owe a large sum of money and have to make small monthly payments that barely put a dent in your debt.
They Can Place Levies on Your Property
The IRS can do a number of things on top of charging you interest and adding penalties into the mix when you don’t pay them on time. At first, they will contact you in the hopes of having you acknowledge that you own them money and set up a payment plan to clear up the debt. However, if you continue to ignore their notices and don’t make an effort to work with them to establish a payment plan, they have the ability to place levies on your property in an effort to entice you to paying.
Some examples of the items that can be levied include:
- Physical property – Any buildings, vehicles, and equipment owned by your small business can have an IRS levy placed on them. For example, a manufacturing company that also delivers its own goods in a fleet of trucks may have to deal with the IRS levying both the assembly line equipment, trucks and trailers, and the building that it owns. You won’t be able to sell any of that property without paying the IRS first, if you’re authorized to sell them at all.
- Bank accounts – The IRS can freeze your company’s bank accounts in an attempt to collect any money that you owe in back taxes. Either the account will be emptied, if those funds are available, or a hold will be placed on the account so nothing can be withdrawn.
If you continue to avoid paying the IRS, they can seize your property and sell if at auction in order to recoup the money owed to them. This can greatly affect your business and how it operates, leaving you without some the crucial items that you need to keep your business up and running.
They Can Suspend Your Passport and Licenses
Did you know that the IRS can suspend your passport, driver’s license, and any professional licenses as well? While this last resort option mainly happens to individuals who owe back taxes, the rules can affect small business owners as well, particularly if the business is set up as an S corporation, a sole proprietorship, or an LLC. (Since C corporations are liable for their own tax debts and view the shareholders and owners as separate entities, any money owed to the IRS by the business is legally separated from them.)
This means that if you’re the sole proprietor of a small accounting firm, then you could lose your license to operate if you can’t pay the IRS any money that’s owed to them. Obviously, having that license suspended directly effects your ability to generate income, so it’s better to work with the IRS in order to come up with a viable solution that works for both parties.
What You Should Do
If your business owes the IRS money at tax time but can’t pay it immediately, you do have several options to protect yourself from all of the scenarios described above. Avoiding any audit attempts and crossing your fingers while hoping that your bank account doesn’t get levied are not good options. However, the following are strategic and proactive solutions that you can (and should) pursue if you owe the IRS taxes:
- Request a Filing Extension – If you request a filing extension, then you not only have more time to file your return, but you also have more time to come up with the money that you owe the IRS. Since that amount is due at the time of the filing, it’s important to request an extension far enough in advance to allow you to raise the money owed. Since an extension is granted by the IRS, you won’t have to pay any penalties, fines, or interest on the amount due, as long as you can get everything in by the extended filing date. This is a great option for businesses that believe they can gather up the liquid funds if only they have a bit more time.
- Set Up a Payment Plan – Although a payment plan has its downsides, since you’ll have to pay a fee to get it set up and the IRS will charge you interest until the debt is paid off, it is a good way to prove that you’re doing your due diligence and have every intention of paying what your small business owes. The IRS prefers automatic payments that come out of your account every month, since they are easier to process. The overall approval process for these plans is fairly smooth, especially if you owe less than $25,000 and believe that you can pay off the amount in five years or less.
- Consult an Expert – Owing money to the IRS can be nerve-wracking, and it isn’t something that you should try to deal with by yourself. Seeking help from a tax professional who has ample experience dealing with the IRS, especially when it comes to small businesses and the taxes that they owe, can help soothe your nerves and make sure that everything goes smoothly. When in doubt, seek professional tax guidance, particularly when your situation involved the IRS. An experienced tax professional can help you contact the IRS to set up a payment plan, request a filing extension, and act as an intermediary in all of your dealings with them to ensure your best interests and financial situation are taking into account on all fronts.
Contact Us for Assistance
If you have tax-related questions or owe money to the IRS, the tax advisors at Enterprise Consultants Group can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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