Pile of envelopes with overdue utility bills. concept: back taxes
By: omunoz
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What do I do if I have back taxes?

“A setback is never a bad experience; just another one of life’s lessons.” I don’t know if Richard Branson said this thinking about back taxes, but I’m pretty sure owing the IRS can be considered a setback, one that could put the future of your business at risk.

In this article, we will tell you what back taxes are, and we’ll talk about tax liens and other consequences of owing the government. We will also explain step by step how to declare the taxes you owe.

What are back taxes?

The IRS expects taxpayers to pay their taxes on time. Unfortunately, not everyone does. 

Back taxes are all tax obligations that have not been paid 60 days after the deadline. The bad news is that the IRS has up to 10 years to collect these taxes.

There are several consequences of not filing nor paying your taxes. Among them are interests, fines, and the possibility of losing your tax return.

But among the most severe effects of back taxes are tax liens and levies, not to mention the criminal charges you might face.

What happens if they impose a tax lien?

A tax lien is a legal claim that the IRS or any other government agencies can make on your personal property or your business assets if you have back taxes.

But this measure goes further. If you do not pay, the IRS will enforce the lien with a tax levy, that is, they will seize your assets to cover your debt. 

A tax lien can affect your business in different ways:

  • Your assets are compromised

The government can impose a lien on your personal or business assets, depending on how your company is structured. This means that you will not be able to sell the claimed assets and that your properties could be seized.

  • You’ll have a hard time getting a business loan

The tax liens are recorded in your business’ credit report, decreasing the credit score

With a lower score, you will have less opportunity to access a business loan, as you will seem less reliable to lenders, who can deny your application. 

  • You might lose your properties

This is the IRS’ last resort to recover what you owe them. If you do not pay your taxes, the agency will seize the retained assets. 

These may be business assets if your company functions as a corporation or a Limited Liability Company or LLC; or your personal assets if you operate as a sole proprietorship.

Fortunately, a tax lien is not the end of your business. There are several ways in which you can minimize the effects of this drastic measure. Paying your back taxes is, of course, the most obvious. You can cancel your debt if you negotiate a payment plan or agree to an Offer in Compromise with the IRS.

Internal Revenue Service sign with a traffic signal in the foreground indicating a red light. Concept: back taxes

Learn more about how to remove a tax lien.

How to declare and pay back taxes in 4 steps

You know what they say, “Its never too late.” This is also true when it comes to filing and paying your taxes. The IRS is willing to work with debtors so they can pay any overdue taxes.

But you must show the agency you want to cooperate with them. Keep a line of communication open with the IRS, explain your circumstances, and never ignore their notifications. This is the first step to address your debt and avoid penalties.

If you are going to file and pay your back taxes, this is what you should do:

1. Gather all the necessary documentation

Before filing, make sure you have all the required documents. These include the forms that you must submit, depending on the structure of your business

Keep in mind, you must use the original forms, the ones that correspond to the year or years that you are going to declare. Old forms are available on the IRS website

To submit your overdue statements, you will need the forms that specify the income you received during those years. You can request transcripts of forms such as W-2 or 1099-MISC, using Form 4506-T

If you are eligible for deductions, you will also require documents such as receipts or other records that show that you are, indeed, eligible.

2. Prepare your tax return

You cannot complete a previous year’s tax form the same way you’d fill out the current fiscal year form. The tax legislation changes annually, and if you incorrectly fill old forms, you will have to file them again.

Make sure you also complete the forms with accurate information. 

Verify your return as many times as necessary by comparing it with the IRS transcripts and other documents to make sure you have included all your income, withholdings, and the estimated tax payment.

3. Send the forms and money

Send the forms along with a check to the IRS. On the agency’s website, you can find a list of the addresses of their offices. 

The higher the payment, the lower the interest on the debt you will have to pay. Remember, fines cease to accrue when the maximum percentage allowed is reached, but interest continues to do so until the debt is canceled.

After receiving your statement, the IRS will notify you of the fines and interest you still owe.

4. Supervise the process

Finally, you have to make sure that the IRS actually processed your statement. Contact them to see how the process is going. 

If the agency has already taken action, such as submitting a Substitute for Return or a tax lien, make sure that they are revoked.  

Tax declaration with dollars and coffee top view. concept: back taxes

Filing and paying back taxes can be complicated and cumbersome, especially if the debt has accumulated for several years, and you need to submit many forms. It might be helpful to bring a tax expert on board or use software to prepare taxes (or both).

You can still pay your back taxes

It is never too late to meet your tax obligations. 

Overdue taxes can become an obstacle for your business. Not only do they put your company’s assets at risk, but they also significantly reduce your chances of getting the loan your business needs.

The remaining steps that will allow you to pay your back taxes, and will make you feel calmer, are completing the return, submitting the forms and money, and keeping tabs on how the process is going.

In Camino Financial, we don’t leave any business behind, and we want you to be part of our community. Subscribe to our newsletter and get advice on finance, taxes, and innovative ideas that will help you manage your business.

Keep reading: How to Expect From an IRS Audit 

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