There are many tax resolution and tax relief programs designed to help individuals and small businesses sort things out with the IRS. After all, the IRS’s goal is to collect the money you owe—not punish you until you’re forced out of business.
Running a small business can be overwhelming at times, and sometimes things get overlooked. Rather than panic when you realize you haven’t filed taxes or you can’t pay your tax debt, relax. You and the IRS share a common goal: getting your taxes sorted out and back on track.
Catching up on overdue taxes
There are many reasons why you might have fallen behind on your taxes. You might have been filing incorrectly, or perhaps your own bookkeeping has gotten a bit unorganized, making it hard to figure out how much you owe the IRS. And while many small businesses make estimated payments throughout the year, the calculations must be exact at filing time.
When the IRS contacts you regarding back taxes, they often send a tax bill for what they think you owe. Still, they aren’t privy to your bookkeeping system, so their calculations may be incorrect—especially if you qualify for any small business tax deductions or tax credits to help lower your total bill. When sorting out your tax bill, your first step is figuring out how much you owe the IRS, and that requires accurate bookkeeping.
With accurate books, you know how much you made, how much you spent in the process of making money, and how those numbers translate into deductions and tax credits.
Tax relief programs
In 2011, the IRS started a new initiative called Fresh Start. The program’s goal was simple—to help taxpayers behind their taxes get back in good standing with the IRS.
As part of the Fresh Start program, there are four different IRS tax relief programs for those who wind up owing taxes to the IRS. Of course, not every program is a match for every tax situation, but if you do find a program that works for your business, working directly with a trusted financial professional is often the fastest and safest way to resolve back tax debt.
An installment agreement is essentially a payment plan you set up with the IRS to get rid of back taxes, or taxes you owe. Installment agreements are designed to give you more time to pay accumulated taxes and penalties, and taxpayers have two options. You can set up an agreement to pay back taxes in less than 80 days, or you can opt for an installment plan that extends beyond 80 days.
You can apply online for both types of payment plans. It’s free to apply for a shorter repayment plan, but application fees do apply for long-term payment plans. If you apply online through irs.gov, applications cost $31, while you can expect to pay $107 for a phone, mail, or in-person application.
If you plan to make your monthly payments by a method other than automatic withdrawals, you can expect to pay $149 to apply online or $225 to apply by phone, mail, or in person. If you want to set up IRS installment payments and owe more than $25,000, you will only be eligible for automatic withdrawals from a bank account.
While an IRS installment plan can be a huge help for managing your tax debt, it is important to note that installment plans do not stop interest or penalties for late payments. Those will stop only when your balance is paid in full.
Offer in Compromise
An Offer in Compromise is essentially a counteroffer you make to the IRS to settle your account. If the IRS accepts your offer, you may be able to pay less than the amount you owe in back taxes. However, it’s important to note that the IRS is much more willing to accept a payment plan than an offer for less than you owe.
Proving your eligibility for this option can be challenging. Less than half of all Offer in Compromise requests are accepted by the IRS, and you will need to prove that paying your total debt is impossible or creates a financial hardship.
You can only apply for an Offer in Compromise if you meet specific requirements:
- You must pay a non-refundable $205 fee.
- You will need to make an initial first monthly installment paymet with the offer if you are offering more than six months of payments, or you will need to make a non-refundable payment of at least 20% of what you’re offering to pay if paying within 5 or fewer months
- You must have filed all your required federal income tax returns.
- You must make all required estimated tax payments for the current year.
- You must make all required federal tax deposits for the current quarter and the two preceding quraters if you are a business owner with employees.
- You should anticipate IRS liens until your offer has been accepted and paid.
- You cannot be in an open bankruptcy proceeding.
- Your offer in compromise may be made public with your name, location, and tax liability.
- You do have the opportunity to appeal if the IRS rejects your compromise.
If you can’t afford to pay your taxes while covering your living expenses, you may ask the IRS to declare your back taxes as “Currently Non-Collectible.” You will need to prove your finances are as bad as you claim, and then the IRS will delay repayment of your tax debt for a period of time.
However, this is not an IRS tax forgiveness plan or tax exemption plan. Your back taxes don’t go away, and the IRS expects you to resolve your tax obligation when your financial situation improves. In addition, the IRS will review your tax situation annually, and they can file a tax lien against you while they wait for future payment.
When the IRS doesn’t receive tax payments by the due date, penalties and fees automatically start to accrue. These are calculations based on estimates and algorithms, and in some cases, the IRS is willing to reduce or remove these penalties.
A penalty abatement letter is sent to the IRS explaining why your taxes are arriving after the tax deadline and asking that the penalties be removed. However, you will need to demonstrate reasonable cause for the late payment, such as natural disasters, fire, a loss of records, or a death or serious illness in the family. The IRS will expect you to provide evidence of the cause, including hospital records or documentation of natural disasters.
To take advantage of the IRS tax forgiveness or relief programs, you must have filed all required federal tax returns. You can’t ask for help from the IRS until you’ve told them—via tax forms—exactly how much you owe them.
Tax relief companies
While the IRS does offer options for small business owners looking to catch up on overdue taxes, navigating those choices can feel overwhelming. In addition, each year, the IRS rejects many Fresh Start program applications due to incorrect or incomplete forms.
That’s why many people find it helpful to work with a tax professional as they navigate the process. The right CPA, accountant, tax attorney, or Enrolled Agent can help you determine which program is right for your tax relief situation or if you need to pursue other options.
If you don’t qualify for IRS tax relief programs or need extra help, you may want to seek support from a tax debt help company. While there are companies that can help, many others take advantage of individuals or small businesses looking for relief.
If you’re already working with Bench on getting your past, present, and future records in shape, you’re in luck. We have a referral network of trusted tax debt relief companies that may be able to help you sort out your small business taxes. The companies we work with are heavily vetted to be sure they provide the highest quality tax relief.
Finding a reliable tax professional
Tax debt can be a major source of stress, and unfortunately, many companies will prey on individuals and businesses in sticky situations with the IRS. Rather than helping you, these companies are more interested in improving their own bottom line and can leave you in a worse position than when you enlisted their help.
If you’re considering working with an IRS debt relief company, here are some red flags to watch out for:
They aggressively advertise. All companies market to their customers, but tax professionals aren’t used car salespeople, and their advertisements shouldn’t remind you of daytime infomercials. So if you keep hearing ads on the radio, on television, or through unsolicited emails, be wary of the services they provide.
They make promises about what they can do. Every tax situation is different, so if a company claims they can “stop wage garnishment” or “significantly reduce your tax debt” without any knowledge of your tax situation, be assured something is suspect. Remember that the IRS rejects most applications for Offers in Compromise or settlement offers.
They require a substantial upfront fee for services. A scammer’s business model is simple: get as much money upfront as possible and then bail. If you pay a large initial fee to an illegitimate company, they may take your money and run, or they may milk you for more funds as they “negotiate” on your behalf.
They have bad online reviews. These days, it’s a good idea to check out any company’s online reviews before you commit. Shady businesses are typically called out quickly on consumer review and complaint websites. A complete lack of reviews, or a very limited number, can also signify that the company you’re looking to work with isn’t very well-established. This would make sense for scammers who open new “businesses” and then shut them down quickly when complaints form, only to open a new “business” under a new name.
They fail to provide references. A tax relief help company should be someone you are willing to trust with your financial information, which means they should be able to provide quality references. If you are working with a bank, a bookkeeper, or other financial service provider you trust, ask for their recommendations or references on tax relief companies or programs. Quality financial companies are typically aware of the reputation of others in their industry.
They charge you for free services. The IRS makes it easy to do certain things for free. There is no need to pay a company to do them on your behalf, and a company that tells you otherwise is suspect. You can typically do the following without any charge:
- Find out any balance you owe with the IRS.
- Get your tax records from the IRS via tax transcripts.
- Set up a payment plan with the IRS.
- See if you qualify for an Offer in Compromise.
Taking action on tax debt
You would have a hard time finding business owners who enjoy dealing with the IRS, especially when they are in a position of owing tax debts. When you realize that things have gotten a bit sideways with the IRS, it can be disconcerting at best, and at worst, terrifying.
Fortunately, tax debt with the IRS is a problem that can be resolved, even if the bill winds up a bit more than you can pay now. And best of all, once you’ve taken the time to get your past bookkeeping and tax returns and payments under control, you’ll be in an excellent position to stay on top of your financial obligations to the IRS moving forward.