Running a small business comes with plenty of responsibilities, and staying on top of tax obligations is one of them. Even with careful planning, issues can arise. An unexpected tax notice, missed filing deadline or unpaid tax balance can create stress and uncertainty, especially when penalties and interest begin to add up.
Fortunately, many tax problems can be resolved. Understanding your options and taking action early can help minimize the financial impact and prevent a manageable issue from becoming a larger problem.
Here are answers to some common questions small business owners have about resolving tax issues.
What should I do if I receive a tax notice?
If you or your business receives a tax notice from the IRS or a state agency, don’t ignore it. Start by reviewing the notice carefully. It may relate to:
- A balance due
- A missing tax return
- A proposed tax adjustment
- A payroll tax deposit issue
- A request for documentation
Pay close attention to the response deadline. Missing it can limit your options and lead to additional penalties and interest. Tax authorities may eventually pursue collection measures, such as liens or levies, on unpaid amounts.
A lien is a legal claim against property, which can affect your ability to secure credit or complete financial transactions. A levy allows the tax agency to seize assets to satisfy the debt.
Before making a payment or sending a response, confirm that the notice is accurate. Your CPA can help compare the notice with your business records, gather supporting documentation and determine the appropriate response.
What if my business has unfiled tax returns?
If you’ve fallen behind on filing tax returns, it’s important to address them as soon as possible. In many cases, you’ll need to file past-due returns before you can qualify for certain resolution options, such as a payment plan or settlement program.
How far back you need to file depends on your circumstances, the type of return involved and the tax agency’s requirements. There generally isn’t a simple time limit that makes an unfiled return “go away.”
For federal income taxes, the statute of limitations for the IRS to assess additional tax for a particular tax year generally starts only after a valid return is filed. It’s typically three years, but it’s six years if you understate your gross income by more than 25%. If you fail to file a return (or you file a false or fraudulent return), the IRS has an unlimited amount of time to assess tax for the tax year.
Filing past-due returns can help reduce the risk of penalties, interest and collection activity. It can also help you avoid having the IRS prepare a “substitute for return” on your behalf. These returns generally include your reported income but may not account for all the deductions, credits and other tax benefits you’re entitled to claim.
If you’re owed a refund, filing promptly is especially important. Federal tax law limits how long taxpayers have to claim refunds, and waiting too long could mean losing a refund you’re otherwise entitled to receive.
What are my options if I owe back taxes?
If your business owes taxes that you can’t immediately pay in full, you may have several options. The best approach depends on the amount owed, the type of tax involved and your financial situation.
Options for managing tax debt may include:
- Making a payment
- Requesting a temporary delay in collection due to financial hardship
- Participating in a settlement program
- Setting up an installment agreement or payment plan
An installment agreement or payment plan may give qualifying taxpayers additional time to pay the balance. However, you’ll generally need to stay current with future tax filings and payments. Falling behind again can cause you to default on your payment plan and potentially lead to additional collection actions.
Can I settle my tax debt for less than the full amount owed?
In some circumstances, yes. Certain tax agencies offer settlement programs that allow eligible taxpayers to settle tax debt for less than the full amount owed. For federal tax debt, the IRS offer in compromise (OIC) program may be available in limited circumstances.
However, an OIC isn’t available to everyone and may not be the best option for your business. The IRS reviews income, expenses, asset equity and ability to pay when determining whether to approve a request.
Before applying, you’ll generally need to have all required tax returns filed. You also must be current with ongoing tax obligations, including estimated tax payments and federal tax deposits.
Working with a CPA can help you evaluate whether a settlement program or another payment arrangement is appropriate for your situation.
Can tax penalties be reduced or removed?
Penalty relief may be available in certain circumstances. Depending on the penalty and the facts involved, you may qualify for administrative relief, such as an automatic exemption from penalty, first-time penalty abatement or relief based on reasonable cause.
Reasonable cause may apply when you made a good-faith effort to meet your tax obligations but were unable to do so because of circumstances beyond your control, such as:
- A serious illness
- A death in your immediate family
- A natural disaster
- Loss of records
Penalty abatement isn’t automatic. You’ll need to follow the instructions in the notice and may be required to contact the IRS or submit a written request with an explanation and supporting documentation.
Even if penalties are reduced, interest may still apply. Addressing the issue promptly can help prevent additional costs.
Why are payroll tax problems especially serious?
Payroll tax problems are among the most urgent tax issues small business owners can face.
If you have employees, you’re responsible for withholding federal income tax, state income tax (if applicable), Social Security tax and Medicare tax from their wages and remitting those amounts to the government.
Tax agencies closely monitor these payments because businesses are withholding money on behalf of employees and holding it in trust until it’s deposited with the appropriate tax authority.
In some cases, business owners or other responsible individuals may be held personally liable for unremitted taxes through the Trust Fund Recovery Penalty. The penalty can apply to individuals who are responsible for collecting, accounting for or depositing the taxes and who willfully fail to do so.
If your business falls behind on payroll tax deposits, seeking professional guidance promptly is especially important.
How can I avoid future tax problems?
Resolving an existing tax issue is important, but preventing the same problem from happening again is just as valuable.
For small business owners, prevention starts with accurate bookkeeping, reliable accounting systems and timely tax filings. Regularly reviewing financial reports, monitoring cash flow and setting aside funds for tax obligations can help you stay ahead of potential issues.
It’s also important to make estimated income tax payments and deposit withheld payroll taxes by the required deadlines.
Working with your CPA throughout the year, rather than only at tax time, can help you identify potential problems early and make informed financial decisions.
We’re Here to Help
Whether you’ve received an unexpected tax notice, fallen behind on filings or are struggling with an outstanding tax balance, addressing the issue early can make a meaningful difference.
The tax professionals at Hawkins Ash CPAs can help you understand your obligations, evaluate available options and develop a practical plan to resolve outstanding tax issues.
Contact Hawkins Ash CPAs to discuss your situation and determine the next steps for your business.
