Taxes wait for no man (or woman), but sometimes life just gets in the way. Perhaps you’ve gotten behind—really behind—in filing your business taxes. You know you need to get caught up, but how do you get started?
Getting back in the clear on back taxes might be easier and perhaps less expensive than you’d think. Like any big problem, you can take back control by working your way through it one little step at a time.
How long can you go without filing taxes?
The IRS expects every business to file a federal tax return and pay taxes every year. So the real answer to that question is (drumroll please): Zero.
There are no IRS-issued guidelines or allowances that will let you skip filing taxes for a year.
That being said, the IRS also realizes that life doesn’t always go smoothly. Medical emergencies, the death of a loved one or business partner, a natural disaster, or other events outside one’s control can cause severe disruption of one’s finances, causing business owners to fall behind on all kinds of obligations.
So while you’re not technically allowed to skip filing a tax return, if you do miss the tax filing deadline this year, they won’t come knocking on your door. Instead, you’ll begin incurring failure-to-pay and failure-to-file fees until you get your tax forms sorted out. The sooner you get them in, the sooner you stop the fees from piling up.
Note, too, that the IRS does not have a statute of limitations on missing or late tax forms. If you didn’t file taxes for the last two, three, ten, twenty, or fifty years, the IRS will still accept your forms as soon as you can get them submitted.
The IRS’s rules are a bit different when it comes to tax refunds, however. If you’re hoping to claim a tax refund, you can only do so for three years. That means you might be forfeiting some money if you don’t file within that time period.
What happens when you don’t file taxes?
If you have a business and you don’t file taxes, you, or more likely the IRS, will eventually realize you missed the due date. For many business owners struggling to stay caught up, a mailed notification from the IRS about a missed filing and potential fees are likely the first sign that the deadline has flown by.
The notice from the IRS will let you know that you’ve missed the deadline and are now incurring fees. There are two back tax penalties that the IRS uses when you’ve missed an income tax filing deadline.
The failure-to-file penalty is what the IRS charges you for not submitting the paperwork for your income tax return. The failure-to-file penalty is 5% of the unpaid taxes for each month you fail to file your business tax return.
The failure-to-pay penalty is just that: you didn’t pay your taxes, and the government will penalize you with a fee of 0.5% of your unpaid taxes every month.
If you haven’t filed your tax returns or paid your tax liability, the IRS will likely apply the maximum penalty of 5% per month until your full penalty payment hits 25% of the taxes you owe. That can take up to 45 months since the 5% filing fee stops after 5 months.
So, financially speaking, the bill starts increasing once you miss the deadline to file taxes.
The bill stops increasing once it hits 125% of the total taxes you were originally due to pay, provided you’re acting in good faith. You can minimize your penalties by submitting your tax return forms as soon as possible—even if you can’t pay the full amount of taxes you owe yet.
Because the failure-to-pay fee is 10 times greater than the failure-to-file fee, it makes sense to file your taxes as soon as you can, even if you can’t immediately pay the amount you owe.
If the IRS finds you intentionally underreported your income or were otherwise negligent, there are additional fees of up to 40 percent of the amount you are expected to pay. And discrepancies like underreporting income, even if accidental, are a significant audit trigger to be mindful of.
In typical late filing situations, however, the IRS is not going to use compounding interest or exorbitant fees to create a crushing financial burden for late filers. They want you to get your taxes filed and paid so you can be back in good financial standing, which is why the IRS offers a number of avenues for business owners to do so (we’ll get more into that in a moment).
Because there’s no statute of limitations on back taxes, the IRS can pursue missing tax payments for as long as they choose.
As you can probably imagine, the longer you go without filing or paying, the more insistent their methods for collecting become.
At first, you’ll receive an official notice via U.S. mail (the IRS always communicates by mail—if you’re getting threatening messages by phone or email, it’s a tax scam, asking you to contact them to get your records in order.
If you ignore these notices, the IRS may escalate, resulting in additional letters and notices, and culminating in a notice of an intent to levy your assets. In an extreme case like this, the agency may seize assets or start levying money directly from your bank account.
Regardless of the reason you didn’t file, it’s critical to address your unpaid taxes up front and respond to the IRS when they contact you. That way, you prevent an already stressful situation from getting worse.
How do you file back taxes?
Back taxes are the tax forms and payments that are overdue to the IRS. If you’ve been receiving notices about owing back taxes and feel out of your financial depth, your first step might be to speak to a tax professional like an enrolled agent, CPA, or tax attorney to help you through the process.
A good tax resolution service can be a huge asset as you navigate this process. While they won’t get your tax debt down to zero, they will be able to negotiate on your behalf for a reasonable payment plan, get your books up to date so that you’re not missing any tax deductions that could lower your total debt, and generally reduce the stress of this very stressful situation.
Be mindful that some unscrupulous companies or individuals claim to be able to “fight the IRS” on your behalf to remove debts completely or negotiate them away. These are likely scammy set-ups designed to prey on those who look for help faster than they look for proper credentials.
With the help of your tax expert, or on your own if you are comfortable doing so, you’ll take the following steps to resolve your back taxes.
Contact the IRS about your intent to file and pay. The longer you ignore the IRS, the more insistent they become.
Sort out your bookkeeping. Use your receipts, credit card statements, bank statements, invoices, and any other financial statements to sort out your income and expenses so you know your true financial picture for each year of missing taxes. You want to have up-to-date books for every year you’ve missed. This is vitally important, as the amount you actually owe once your books are totally up to date may be less than what the IRS estimates that you owe from the information they have available.
File your tax forms. Remember, once you file your tax forms, even if you can’t pay the taxes yet, the failure-to-file fees stop accumulating.
Pay the IRS what you owe. You’ll likely owe your business taxes plus some fees for filing and paying late. The sooner you get these paid in full, the sooner you’re squeaky clean with the IRS.
Once you’ve cleaned up past issues with the IRS, take some time to prep for future tax filings. Having good bookkeeping systems in place or setting up an ongoing relationship with a bookkeeping and tax filing service can make your future tax filings a breeze, ensuring you never wind up facing this situation again. Who knows? You might even find new opportunities for tax deductions to save money.
What if you can’t pay what you owe?
If you’ve been stalling on filing your taxes because you’re worried you can’t pay what you owe, relax. Remember that the IRS is interested in collecting what you owe, not making it impossible for you to pay it. There are several IRS tax relief programs if you’re faced with a tax amount you can’t pay all at once.
The IRS appreciates it can be challenging to pay large tax sums in a single payment. That’s why the agency has an initiative called Fresh Start to help taxpayers get back into good standing with their tax bills.
As part of this program, taxpayers who can’t pay their full tax bills have four options for how to work with the IRS to sort out what they owe.
Installment agreements let you pay your taxes off in smaller payments over time. There are short-term and long-term installment agreements, including automatic withdrawal options to make a payment plan even simpler.
Offer in compromise
An offer in compromise lets you make a counteroffer to the IRS. The IRS says you should pay “A” amount, and you counteroffer to pay a lesser amount in one lump sum instead. Be aware that an offer in compromise has strict requirements, so it isn’t a common solution for most businesses and individuals with back taxes. If this is the route you’re interested in, it’s best to engage an Enrolled Agent or tax resolution company to help you negotiate.
If the IRS declares your debt “Currently Non-Collectible,” then you have a reprieve from paying immediately due to serious financial circumstances. Your taxes aren’t forgiven, but the collection is delayed until your finances improve.
Penalty abatement removes the penalties from your back taxes if you’re able to demonstrate that you had good reasons for submitting your tax returns after the deadline.
How Bench can help
Many small business owners find themselves unable to file and pay the taxes they owe due to circumstances beyond their control. They might be facing the loss of business records, the death of a business partner, or have simply gotten behind and overwhelmed with the bookkeeping necessary for filing taxes.
As America’s largest professional bookkeeping service for small businesses, Bench can help. We can take some pressure off you by handling the bookkeeping and tax filing on your behalf.
Our Bench Retro team specializes in past bookkeeping and can quickly get your books caught up, your tax forms filled out and filed, and on the road to having your business financials back on track.
The weight of overdue financial obligations can be staggering. Thankfully, past-due taxes are a problem with a straightforward solution. Clean up your books (or hire someone to update them for you), fill in the missing tax forms, and submit your income taxes—no matter how many years you’ve missed. Then you can move on and focus on the more important task of running your business.