After working so hard to get your business afloat and give your family a better life, would you be willing to risk the future of your business and yours by not paying your taxes?
No, of course not.
But there are times when back taxes happen, even if we try to always pay on time. Imagine this: a business is not going well, there are fewer clients and less income, debts begin to accumulate, and the owner ends up owing a large sum to the IRS. Fines and embargoes start happening.
But this is not going to happen to you, because we’re here to help you learn how to deal with back taxes.
In this article, you’ll learn how back taxes can affect your business, and what are tax liens and what are their consequences. Besides, we will teach you how to prevent back taxes from affecting your company.
What are back taxes?
Back taxes are the tax obligations that you didn’t pay for a whole fiscal year. The consequences of owing money to the IRS are not pleasant. Even if you request an extension, you cannot avoid penalties such as fines and interest on what is already owed.
Ignoring the debt and letting time pass by won’t get rid of this problem. The IRS has up to 10 years to collect back taxes. The only solution is to pay for them.
Why are back taxes bad?
The consequences of not paying your taxes can range from fines to embargoes. But let’s look carefully at the penalties the IRS could impose if you don’t pay your taxes on time.
Interest and fines
If you file your taxes more than 60 days after the deadline, the IRS may charge you a minimum penalty of $205, or up to 25% of the amount you owe in taxes, plus interest.
If you do not pay them, the fine may vary between 0.5% and 25% per month. As the debt increases each month, due to penalties and interests, you could end up owing a tremendous amount of money.
Tax liens are written complaints that the IRS makes to taxpayers that are behind on their taxes.
When the IRS imposes a lien, they can legally claim a debtor’s assets. On the other hand, tax liens are recorded in the credit report of the taxpayer, affecting their credit score, and making it more challenging to get a loan for their business.
Even if you have a tax lien over your personal assets, the annotation in your report could also affect the possibilities of your business to access financing. Remember that lenders usually review both your personal and your business scores to assess whether you can pay them back.
Likewise, tax liens prevent the taxpayer from selling the assets that have been claimed. Liens are also valid until the tax debt is paid.
If you still don’t pay, things could get worse.
Your properties can be seized
If you do not pay your taxes, the IRS may resort to a tax levy, which means that your assets, claimed by the lien, will be seized to meet the debt.
With this measure, the IRS can seize the assets of your company, such as bank accounts, investments, cars, and properties. If your business is not incorporated, your personal assets may also be compromised.
You can also lose any tax refunds, your passport could be revoked, and you run the risk of spending a season behind bars.
5 ways to avoid back taxes
You are a smart entrepreneur who manages your business responsibly. You shouldn’t have to worry about owing taxes to the IRS with these tips to avoid back taxes.
1. Prepare in advance
We will not stop insisting: preparing your taxes before the deadline will avoid any and all headaches.
Gather and organize invoices and forms, and any other documents you may need to file your taxes. Mark in your calendar relevant dates, such as the deadlines to declare and pay taxes depending on your business structure. Also, make sure you know how to complete and submit your return.
2. Save some extra money
Having all your paperwork in order is essential, but where are you going to get the money to pay your financial obligations? From your very own private tax fund, of course.
Tou can open a savings account just for your tax money.
In this account, you can save a percentage of your earnings, and use it only to pay these obligations. You do not need a large sum of money to open it; you can increase your balance by saving small amounts, in addition to earning interest.
These funds will be available whenever you need them.
3. Get some extra help
Filing taxes is not easy, and they can distract you from your business obligations. But you don’t have to do your taxes by yourself. Hire a tax expert to explain the tax rules, and make sure you declare and pay on time.
Your friends, your bank manager, or other entrepreneurs can give you recommendations of a tax professional, which in turn will help you gather documents and negotiate with the IRS on your behalf if necessary.
If you decided to fly solo and prepare your return yourself, use reliable and easy-to-use tax software.
These programs simplify the entire tax process, as they guide you through the forms that you have to complete, tell you what information and documents you need, and determine what deductions you’re entitled to.
After entering all the data, the software will calculate how much you owe in taxes.
It is not advisable to acquire debt to settle another, but sometimes there is no other choice.
If the deadline to pay your taxes is imminent and you have no money, apply for a loan for your business. Find a lender who can approve your application and deposit funds quickly.
The loan should not compromise your business finances. Applying for a loan is a viable option if you don’t owe much in taxes, and if its interest and rates are low.
Do not be afraid of taxes
The tax obligations that you don’t pay end up becoming back taxes. If you do not pay them, the IRS will take action. It can fine you, impose a lien on your property, and, as a last resort, seize your properties.
But you will not owe to the IRS, because you are a diligent entrepreneur who prepares for the tax season in advance, saves to meet your tax obligations, and is advised by competent tax professionals.