08 Mar How to Make your Business Free from Tax Debts
Business tax debts can give you headache.
The tax return due date coming up and some business owners are afraid that they can’t pay the taxes. Some entrepreneurs may then be worried about the IRS notices that demand full payment for a deficiency.
If you’re among those who worry a lot on tax time, then don’t panic! And don’t make things worse by ignoring the problem and hoping it goes away. In fact, doing so will only add more penalties to your tab and trigger collection action from the IRS. If you can’t pay your tax debt in full, you must still aim to file your tax returns and respond to the IRS notices accordingly. You need to gather all your paperwork, analyze the state of your finances, assess your ability to pay, and propose an alternative payment plan.
The IRS offers below options to help business owners who want to comply with the tax obligations of their business but could not pay in full or need more time to do so:
Short-term payment plan (120 days or less)
You can request for this option if you can’t pay the taxes in full as of filing due date, but believe that you will be able to do so within an extended time of up to 120 days. You are qualified to request or set this up for your business through Online Payment Agreement Application if you have filed all required returns and owe less than $25,000 in combined tax, penalties, and interest.
Otherwise, you may apply via phone, mail, or in person. For businesses, balances over $10,000 must be paid by direct debit. Other payment methods can be found here. If your request gets approved, you don’t have to pay for a user fee to set this up.
Long-term payment plan (more than 120 days)
If you can’t pay in full your business tax debts within 120 days, you can request for a long-term payment plan with a monthly installment agreement. For you to qualify, you must be current on all filing and payment requirements and must not be in an open bankruptcy proceeding.
Under this option, the IRS allows you to propose the amount that you can pay per month as well as your monthly due date (any day from the first to the 28th). Similar to the first option, you can request online if you owe less than $25,000 in combined tax, penalties, and interest. Or you can request through phone, mail or walk-in. However, depending on the request method and payment option selected (direct debit, credit card, check, etc,), various fee schemes apply. Generally, no levies may be served during the duration of the installment agreement.
Offer In Compromise
There are cases where you can’t pay the full amount of business tax debts or paying in full would create financial hardship, then you can request for a partial payment installment agreement or an Offer in Compromise. If approved, this offer settles the tax liability at a reduced amount. To qualify to make an offer, you must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter you are a business owner with employees.
You must not be in an open bankruptcy proceeding either. In reviewing your offer, the IRS will consider your business assets, income, expenses, and future earning potential, and would generally approve if they assess that it is unlikely that the tax liability can be collected in full, and that the amount offered represents the most that they can expect to collect within a reasonable period of time, at the least cost. Once approved, you can pay through lump-sum or installment methods.
Temporarily Delay the Collection Process
If your business can pay current taxes but cannot pay back taxes because it has no distrainable accounts receivable or other receipts or equity in assets to do so, or if tax payment would cause financial hardship, then you can request that the IRS to temporarily delay the collection process until your financial condition improves. Based on the financial information that you provide (Form 433-B), the IRS will assess if your account can be tagged as Currently Not Collectible. However, if approved, your debt doesn’t go away and the IRS will still revisit your ability to pay moving forward.
Reminder on Accrued Interest and Penalties
Even with all these alternatives, you are still paying taxes beyond the original due date, and so the unpaid balance would still be subject to daily compounding interest and monthly late payment penalty until the liability is fully paid. Thus, it is advisable that you first explore all options for you to be able to pay in full the soonest. For example, obtaining a cash advance or a bank loan to pay off your tax debt might be more cost effective than owing the IRS and incurring continuing interest and penalties, as bank fees and interest rates tend to be lower than the charges imposed by the IRS.
Take the first step to making your business tax debt-free! Stay compliant and volunteer for an alternative payment plan.