My Business Owes Back Taxes: What do I do next?

Back Taxes

Many entrepreneurs strive to fulfill their obligations by promptly and completely settling their small-business taxes. Nevertheless, it is plausible to overlook a deadline due to an overwhelming number of daily responsibilities or an unmanageable tax liability.

Neglecting to file and remit overdue taxes can result in various complications and sanctions. Therefore, it is imperative to take appropriate measures when confronted with outstanding tax liabilities in order to restore financial stability to your business.

Repercussions of having outstanding business tax liabilities

Consequences of failing to pay your taxes on time include the accrual of interest and penalties, which can accumulate rapidly. If you file your return more than 60 days after the due date, the IRS can impose a minimum penalty of $205 and a maximum penalty of 25% of the amount of taxes owed, in addition to interest. Late payment penalties can range from 0.5% to 25% of your unpaid taxes per month. 

It is important to note that failing to file your tax returns can result in the forfeiture of your tax refund. After three years, the IRS will consider your overpaid taxes a contribution to the United States Treasury and will not issue a refund. 

Additionally, if your taxes become overdue, you will receive a notice from the IRS. Failure to submit payment within 10 calendar days of receiving the notice can result in the filing of a business tax lien on your property, which can ultimately lead to the seizure of your business assets, and personal assets if you are an unincorporated business. 

Furthermore, failure to file your taxes for a number of years or owing more than $53,000 in back taxes and not paying off the amount due under an installment agreement or Offer in Compromise can result in the revocation of your passport by the Secretary of State.

Please be advised that the Internal Revenue Service (IRS) acknowledges that under certain circumstances, individuals may have justifiable reasons for filing and paying their taxes after the designated deadline. It is important to note that in such cases, the IRS will not impose any penalties. For instance, if an unforeseen event such as a fire has resulted in the destruction of your financial records, or if you have experienced a bereavement within your immediate family, the IRS will consider these circumstances as reasonable cause for the delay. 

Also, it is crucial to recognize that aside from potential legal implications, there may also be significant financial consequences associated with the failure to file overdue business taxes. Neglecting to file taxes that are past due could potentially render you ineligible for both personal and business loans. It is therefore imperative to fulfill your tax obligations in a timely manner to avoid any adverse effects on your financial standing.

What to do If your business owes back taxes

If your business is currently in arrears with tax payments, it is crucial to take the following steps to minimize the negative impact:

  1. Apply for a tax return extension: By filing for an extension, you can postpone the deadline for submitting your tax return until the fall, providing you and your tax preparer with additional time to gather the necessary information. It is important to note that this extension does not reduce the amount of taxes owed or halt the accrual of interest and penalties, but it does grant you more time to compile your return.
  1. Promptly respond to all IRS notices: It is essential to respond as soon as possible to any notices received from the IRS, whether through email or regular mail. Maintaining open lines of communication with the IRS is crucial, even if you are unable to afford your tax payments.
  1. Consider establishing a payment plan: If you are unable to pay your entire tax bill immediately, you have the option to set up a short-term or long-term payment plan with the IRS. Eligible businesses can establish a payment plan online. Alternatively, you may be able to take advantage of an offer in compromise, which allows you to settle your tax bill for less than the amount owed if you could demonstrate an inability to pay.
  1. Request currently not collectible status: If the IRS determines that you are unable to cover reasonable living expenses and repay your taxes, they may temporarily place your account in a “currently not collectible” status. While you will still be responsible for the tax owed, penalties and interest will continue to accrue. However, the IRS will refrain from engaging in collection efforts during this period. Your financial situation will be reviewed annually, and you will be expected to pay when you are able to do so.
  1. Seek assistance from an Enrolled Agent: If you owe a significant amount in back taxes, it is advisable to engage the services of an Enrolled Agent who specializes in resolving tax debt across the U.S. Their expertise and experience will be invaluable in navigating the complexities of your situation.

If you have already filed your tax return on time but discovered an error, it is important to file an amended tax return promptly to rectify the mistake.

How do I  file and pay business back taxes

If you have missed the tax deadline you can E-file your 1040 returns for the previous two tax years. If you need to file for tax years further back than two years, or if you have past due taxes that are not reported on Form 1040, you will still need to use paper forms. It is important to note that corporations, partnerships, and multi-member LLCs typically have different forms for their small-business tax returns.

In such cases, it is imperative to use the original forms for the specific tax years you are filing for. This means that you cannot utilize this year’s tax preparation software package or tax return to file for the previous year’s taxes. Attempting to do so may result in complications with your current year’s return and will likely require you to resubmit the past due tax return. 

To access any previous year tax forms, along with the corresponding instructions and tax tables for each year, you can visit the IRS website. Simply search for the appropriate tax form number or form title.

After settling your outstanding debts, it is imperative to adopt measures that will prevent future indebtedness. To effectively evade the burden of unpaid taxes, it is crucial to adhere to certain key actions. These actions encompass timely submission of your tax return, collaborating with a qualified accountant, giving precedence to settling IRS obligations over payments to vendors and suppliers, and implementing additional strategies as deemed necessary.


If you have any questions please call us at 256-489-1478 or visit www.profitwiseaccounting.biz