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According to the U.S. Internal Revenue Service (IRS), it’s estimated that more than 8 million Americans owe over $80 billion in back taxes. Most business owners do their best to pay their small business taxes in full by the due date. However, it’s possible you might miss the deadline because of too many things to do. Or, you might not be able to afford your full tax bill.
Failure to file and pay past due taxes can lead to a number of problems and penalties. Here’s what do when your business owes back taxes, so you can get back on track with the IRS and the day of day responsibilities of running your company.
Under the standard tax deadlines for businesses, most companies must file their tax return and pay their full tax liability by March 15 or April 15 of the year, depending on the type of business you have (taxes are due the following business day if the 15th falls on a weekend or on a holiday). If you don’t file and pay your taxes by the deadline, your business owes back taxes.
Here are just a few of the issues that can arise if your business owes back taxes:
Remember, if you have reasonable cause for filing and paying your taxes late, the IRS won’t charge you any penalties. For example, if a fire destroyed your financial records or you had a death in the immediate family, the IRS will accept this as reasonable cause. Other than legal issues, there can also be financial ramifications if you fail to file past due business taxes? Failure to file past due taxes could disqualify you from getting a personal or business loan.
If your business is behind on taxes, here are the steps you should take to mitigate the damage:
If you filed your tax return on time and found that you made a mistake, you should file an amended tax return.
If you missed the tax deadline, you’re in luck: the IRS has made the process to file your back taxes easier. In years past, all past due tax returns had to be filed on paper forms. With the introduction of Modernized e-File, you can electronically file your 1040 returns for the past two tax years. If you’re going back further than two years, or if you need to file past due taxes not reported on Form 1040, you’ll need to file using paper forms. Corporations, partnerships, and multi-members LLCs usually use different forms for their small business tax returns.
In that case, you must use the original forms for the tax years for which you are filing. In other words, that means you can’t use this year’s tax preparation software package or this year’s tax return to try to file last year’s taxes. Doing that might cause problems with the current year’s return, and it will almost certainly lead to you having to submit the past due tax return again.
You can find any previous year tax forms you need—as well as the instructions and tax tables for each year—on the IRS’s website. Simply search for the appropriate tax form number or form title.
If you’re more than a year or two past due on your tax filings, you might have a hard time locating your tax documents. If your business is your sole source of income, you’ll have to catch up your bookkeeping in order to be able to accurately complete your previous year’s filings.
This means you’ll need to recreate your books using your bank accounts and credit card statements. Banks and credit card companies are getting better about allowing access to historical statements online, but if you use a smaller bank (local banks especially, which don’t always have robust online banking services), you might have to request statements from them.
If you also have income from a W-2 job, or if your spouse was employed, you will need the W-2s for each tax year. You could either ask your employer—or your spouse’s employer—for a copy of the W-2s from previous years. Employers should keep these records for at least four years, and many employers retain payroll tax records much longer. Asking your employer for a copy of your W-2s should be your first course of action. This also holds true if you were a 1099 payee. Ask the business that paid you for a copy of your 1099. They should have a copy as long as they paid you $600 or more for the year.
If you can’t get a copy of your W-2 or 1099 from the payer, either because the payer is unreachable or because you have back taxes that fall outside the record-keeping requirements, you can complete Form 4506-T to request a transcript from the IRS. There’s an online alternative to request a transcript. Just keep in mind that IRS transcripts only include federal tax information. If you live in a state where you must file a state or local tax return, you’ll have to contact those tax authorities and ask if transcripts are available.
It’s especially important to pay your back taxes before applying for a business loan. Most lenders require at least your most recent tax return in order to process a business loan application. Some require several years’ worth of tax returns. There are several reasons for this:
Your lender will probably also ask to review your company’s financial statements, but this does not preclude your requirement to provide tax returns with your loan application. Your tax return does not take the place of a carefully kept set of books, but it is usually the “final word” on the assets and liabilities in a company. Not all business owners work with a bookkeeper who enters the tax preparer’s adjustments into the bookkeeping software. Your lender will be aware of this, and they will want to examine your tax return so that they can get a complete picture of your business’ assets and liabilities.
If you have an existing tax lien against your business or if you are currently on an IRS payment plan, your eligibility for a business loan will depend on the specific requirements of the lender. Some lenders don’t mind if a tax lien falls under a certain amount of money, but others require you to fully resolve a tax lien before applying.
Some business owners are impeccable with their business finances, but their personal finances are much less organized. Depending on the type of loan desired, as well as the entity structure of the business applying for the loan, many lenders will want to take a closer look at the personal finances of anyone who owns 20% or more of a business.
The lender might even require a personal guarantee of the loan, meaning if the business defaults, the owners or shareholders could be on the hook for repaying the loan. That’s why owing back taxes personally can be harmful if your business is in need of funding.
Just as your lender will likely request your business tax returns so they can make a decision about the business’ ability to repay the loan, they’ll also likely want to see your personal tax returns to determine if you will be a viable guarantor of the loan. For this reason, you should file your personal past due tax returns before applying for a business loan. If you are in business with a partner, encourage your partner to file their tax returns prior to applying for a loan, too.
Typically, a business owner does not file their tax returns for one of two reasons. Either they are overwhelmed by the amount of work required to file the returns, or they are unable able to pay the amount of taxes they owe.
Using good business accounting software or hiring a bookkeeper throughout the year can help you with both issues. A good accountant or bookkeeper will make sure your records are in order so tax time is a breeze. At the same time, they will help guide you regarding the amount of your income you should be reserve in a savings account to cover any taxes you will owe at the end of the year.
When your business owes back taxes, it can derail your plans for your business if not addressed. If you haven’t filed your tax return, make it a priority to file as soon as possible. Making sure you file and pay back taxes as soon as possible will put you in the clear with the IRS and let you focus on the fun of running your company.