When a business first falls behind on taxes, whether it be by missing a 941 tax deposit or filing a return with a balance due, not much happens. Compare it to falling into a tranquil part of a river. As you slowly drift down the IRS collections river, you begin to face progressively rougher rapids that can cause bruises and even broken bones (think levied bank accounts, levied accounts receivable, etc.). If you continue to fail to resolve your business tax debt, you will eventually reach a lethal 100-foot waterfall (seizure, padlocked doors, etc.). Not only will this mean the demise of your business, but it is also extremely likely that the IRS will pursue you personally.
No matter what stage your business is at in its dealings with the IRS, it helps to have guidance along the way to help you avoid dangerous rapids (or navigate them safely), and ultimately to bring you safely back to shore. I have seen hundreds of businesses experience the problems that come up when they owe IRS or State taxes. It may surprise you that some business owners persist in making the same mistakes that caused the problem and even continue doing so after hiring an attorney to help them solve their problems.
Below are some of the most common and problematic business mistakes that I have observed my tax indebted business clients make. If you want your business to survive, I encourage you to read carefully. Trust me, you do not want to make these mistakes.
1. Ignoring Tax Debt For Too Long
If you file a Form 941, Employer’s Quarterly Federal Tax Return, owing money, you can expect to get a notice within four to five weeks asking for payment. Those notices get more and more threatening and, if you do nothing, the IRS can issue a bank levy (where they sweep your bank accounts), file a Notice of Federal Tax Lien, and assign your case to a Revenue Officer in as little as 4 to 5 months. As a general rule, if you ignore a business tax debt notice for more than 5 months, you can expect to have to deal directly with a Revenue Officer (human tax collector in your local area) in the near future.
The Revenue Officer (RO) will likely pay you an unwanted visit at your place of business. If you have been filing returns for more than a year and have not paid any taxes, by the time the debt reaches a Revenue Officer for collections, there is a very good chance that you will be levied immediately. To make matters even worse, the IRS knows when you do payroll and they love to levy right before payroll is due (they know your bank account will have a relatively high balance at that time). It goes without saying that employees do not like bounced payroll checks.
There are instances when a business will file a few returns and somehow the IRS overlooks the tax debt and does not try to collect—at least not within the typical 4 to 5-month period. This can lead one to think it might be ok to file another return with a balance due. This can continue until it snowballs, turbo-charged by penalties and interest, to the point where the debt cannot ever be paid without some very lucky help from a Powerball jackpot.
Some business owners will rationalize they are solving a problem by “borrowing from the government” to pay other debts. In truth, they are merely trading one problem for an even worse problem. Short of the mafia, I can think of no creditor more dangerous than the IRS.
Two of my recent business clients both delayed filing and paying taxes for more than two years. Two completely different types of businesses in different areas of the country, assigned to two different Revenue Officers, were both levied almost immediately after being assigned to a Revenue Officer. When I was hired, I went to work immediately to release the levies. I can often negotiate a release of levy by having my client pay the current taxes and offering a payment plan supported by the requisite documentation. So, that is what we did.
All missing returns were quickly filed, the businesses started paying current employment taxes and we put together viable, and well-supported proposals for repayment of the back taxes. We demonstrated compliance and thought that the IRS would release its levies. Nope. In both cases, the Revenue Officers and their managers refused to release the levies because of the track records of the business owners.
The history of not filing and not paying their taxes for well over a year was, in these cases, too much to overcome. Normally, I can get the IRS to cooperate with a levy release and work with the business. However, when failing to pay the taxes looks like it has become a habit, the IRS may very well dig in and refuse to release a levy. This was a painful lesson for my clients to learn. On a brighter note, I was able to prevent additional levies. Doing so likely meant the difference between a painful lesson and the complete demise of these businesses.
2. Not Filing Tax Returns
Just about any business owner has experienced ups and downs. Although the IRS would beg to differ, in my opinion it is understandable to file one or two returns without payment. But I see so many of my clients that don’t even file their returns (that is until they hire me and start following my instructions). I guess that their rationale is that if they can’t pay, why file? This is a big mistake! So many problems can be avoided simply by filing the tax return on time, even if nothing was paid towards the tax liability.
Even if you don’t have the money to pay the taxes, file the return. You will get late deposit penalties and late payment penalties, but at least you won’t exacerbate the problem by also incurring unnecessary late filing penalties.
I have had many clients that did not file years of 941 quarterly employer withholding tax returns. When they finally do file the returns, the accumulated debt is shockingly devastating. What they thought would be a reasonable tax debt will have ballooned into a mountain of debt due to the failure to file penalties and additional interest.
As if salt in the wound is needed, the longer you wait to file returns, the more difficult it becomes to gather all the information together to file. The inability or increased difficulty to find the information necessary to file the delinquent returns creates yet another headache.
One problem I see often when businesses procrastinate filing returns is that, eventually, the IRS will file returns for them. You heard that right. The IRS shares information with the SSA and State tax agencies, so when you report wages to the SSA or your state taxing authority, the IRS will compare what it has on record and if there is no return filed, it will create a substitute tax return, and begin collecting on the amount they enter into your return. They almost always overestimate.
3. Poor or Nonexistent Bookkeeping
A contractor will tell you that they have to account for every cost before they make a bid and start a job. It pays to know what your business is paying and will have to pay. My clients that develop a routine of checking revenues and expenses on a yearly, monthly, and weekly basis are much better prepared to provide me with the information I need to negotiate a payment plan, a tax settlement (Offer in Compromise) or some other tax resolution agreement with the IRS. In fact, in the vast majority business cases, the IRS will not approve a tax resolution agreement without accurate financial information.
Understand that entering into a tax resolution agreement prevents the IRS from taking aggressive enforced collection action (levies, seizure, etc.). Although I have a number of tools that I might be able to use to prevent the IRS from enforcing against a business that has not entered into tax resolution agreement, that tool bag will eventually run dry. At that point, until you enter into an installment agreement or other tax resolution agreement, you may be a defenseless sitting duck for enforced collections. This is a scary place to be, and it is completely avoidable simply by keeping your books up-to-date…something you’re going to have to do sooner or later anyways.
I have also noticed that the business owners that keep tabs on how much their business earns and spends have a better chance at getting out of the debt they are in. Knowing what your business earns and spends will help you avoid many costly errors. Although bookkeeping services are not free, they are almost always cheaper than the unavoidable cost of cleaning up the bookkeeping mess down the road.
Make sure to input all your expenses and income into whatever accounting software you have! A decent bookkeeper will help you identify where the weaknesses are in your budget.
I have had many clients that can’t tell me how much their business earns each month. It is critical to know your net income, and how you arrived at that number.
When a business owes the IRS, it will likely need a payment plan. The IRS determines your monthly payment by calculating your monthly net income. They project that net income into the future as if you will continue to have that level of net income. Your average net income has to make sense from the bank statements and the profit/loss or income/expense statements you provide the IRS. Giving the IRS income and expense information that is inaccurate, unsubstantiated, or incongruent with your bank statements is a costly mistake because you leave the IRS with no choice but to “interpret” your financial information. With very few exceptions, the IRS will always “interpret” financial information in a manner that favors them. In other words, they will insist that your business can afford monthly payments that are much higher than your business can truly afford. Good bookkeeping prevents this.
4. Continued Failure to Timely File or Pay
After IRS collections contacts you about your business debt (and unfiled returns if applicable), it will seriously aggravate the tax collector if you continue to fail to pay or fail to file your tax returns. Keep in mind that Revenue Officers have two functions. The first, and most obvious, is to collect unpaid taxes. What some fail to realize, however, is that their second function is that of a law enforcement officer. If a Revenue Officer is assigned to collect directly from your business and your business continues operate in violation of the tax laws (file on time, pay on time), you can expect BIG trouble.
Continued non-compliance with the tax laws is problematic for a couple reasons. First, everyone is believed by the IRS to have full and sufficient knowledge of the consequences of not paying taxes. So, non-compliance with the tax laws is effectively viewed by the IRS as intentional. Second, if a Revenue Officer gets assigned, one of the very first things they will do is demand that you start paying and filing current taxes immediately. They consider disobedience to be defiance of a law enforcement officer. Keep in mind that they wield a considerable amount of power to enforce the law.
If you persist in failing to file and pay taxes even when the IRS is hounding you for compliance, you will soon face a situation similar to that of my clients above who were levied and could not get a levy release. To make matters even worse, it can be impossible to begin making timely tax deposits when your bank account is frozen. This, in turn, prevents your business from getting into compliance and becoming eligible for a tax resolution agreement, which increases the chances of even more levies.
5. Insisting to Continue Operating a Non-Viable Business that Fails to Pay Current Taxes
Understand that the overwhelming majority of tax indebted businesses that I’ve represented have survived—especially those that retained me before they were deep into collections.
However, there are occasional situations when a business cannot get things turned around enough to break even, continues operating at a loss, and simply does not have the financial wherewithal to begin making timely employment tax deposits after being given ample opportunity to do so. At this point, it may be better to close the business down than to try to keep it going. This not an easy thing for many, as the business often represents the owner’s dreams, blood, sweat, and tears, and the owner can’t imagine what else they would do without their business. The prospect of starting over is daunting.
However, starting over may be a far better decision than continuing to dig an ever-deepening hole. To help some of my clients to see that the decision to close is better than staying open, I remind them that a business owner can be held personally liable for the unpaid trust taxes (the amount that was actually withheld from the employees’ paychecks and not turned over to the IRS), and I show them the debt that they are building for themselves through the business. A corporation or LLC that is supposed to insulate them from the debts of the business won’t keep the IRS away from their personal assets, bank accounts, wages, and real estate.
Business owners are optimistic by nature. I would not tell a business owner whose business is at least breaking even and is meeting current tax obligations that their business needs to close. Even though the business debt is huge, I can almost always find a way for it to continue operating so long as it at least breaks even and pays its current taxes.
But, if that isn’t the case, it may be better to shift the focus to an exit strategy that will minimize the personal consequences to the business owner. Many business owners in this predicament make great candidates for pennies-on-the-dollar tax settlements or possibly even an exit strategy that allows them to simply walk away and start over fresh. Then, a year down the road when their tax problems and business stress have become a thing of the past, they tell me they haven’t felt better in years. Some even have radical improvements to their physical health.
As you can see, falling behind with business taxes is obviously something that should be avoided if possible. But it happens. If your business has fallen behind on taxes despite your best efforts, I strongly encourage you to get help ASAP from a reputable and experienced tax resolution professional (not just a tax professional—few accountants and tax attorneys truly specialize in resolving tax liabilities).
If you involve a tax relief pro early enough in the collection process and follow their instructions, the chances are extremely high that you will never be levied and that your business will survive—or even thrive. In many cases, a good tax relief professional can negotiate realistic monthly payments that your business can afford. In some cases, a good pro can significantly shrink your problem by getting rid of your penalties or negotiating a tax settlement (Offer in Compromise) for far less than your business owes.
Fortress Tax Relief has caring and knowledgeable professionals on staff who would be happy to answer any questions you may have and to outline a solution tailored to your specific needs and circumstances. The problem won’t go away by itself, so pick up the phone and give us a call today!