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How the IRS calculates your overdue tax amount
The IRS determines your total back taxes through information they have about your income.
They’re making estimates based on 1099-NECs from vendors and contractors and Form 1099-K from credit card processors. They might also have 1099s for personal income unrelated to your business, such as dividend or interest income from stocks or savings accounts.
However, this is an educated guess. You may have additional unreported income, and your business certainly has expenses, which can help lower your taxable income.
The advantage of deductions and credits
Before deciding how to pay off tax debt, take an overview of your tax deductions and credits. These elements will often save you money.
The IRS estimates what you owe largely based on your income. It’s not considering expenses that keep your business running.
For example, advertising, office supplies, paying salaries, and business-related travel expenses are all tax deductions you can write off, decreasing your overall tax debt.
Similarly, the list of small business tax credits is extensive. For instance, you can lower your taxable income by incorporating electric vehicles into your business or increasing accessibility for people with disabilities.
If you don’t accurately track your expenses and factor in deductions and credits, you’ll likely pay far more than you need to.
Why every business owner needs bookkeeping
Think about a time you went to a group dinner. Maybe some people ordered appetizers or fancy cocktails, but you just had one plate. When it came time to pay, the table didn’t want to calculate everyone’s particular items and simply split the check. You ended up paying more than you needed to.
That’s essentially what the IRS does when they ask you to pay off tax debt—and you don’t get a tasty meal out of it! They’re not considering your specific expenses, though in this case, it’s because they don’t have access to them.
Without clean, updated bookkeeping, the IRS uses an incomplete picture to determine your tax liability.
How Bench can help
The good news is you don’t have to tackle paying off your tax debt alone. Our team of experts can get your books caught up fast.
Need even more assistance? We can file your taxes for you—with an accurate picture of what you owe, not what the IRS thinks you do. We can also assist you in the tax resolution process to get you back on track.
When you have a handle on your bookkeeping, your whole business operates more smoothly. Now, let’s get rid of that tax debt.
Further Reading
5 Ways to Pay Off IRS Tax Debt
How this entrepreneur got out from under $250K in tax debt
