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Many business owners who approach my firm for bookkeeping work are also several years behind on their tax filings. Before we agree to do any ongoing bookkeeping or consulting work, our first step is to catch up their bookkeeping so their accountant can file past due taxes.
We don’t do this just because it’s good accounting. Failure to file past due taxes can lead to a number of problems. Here are just a few of the legal issues that can arise if you don’t file past due taxes:
These are a few of the legal issues you could face if you don’t file your tax returns. Most of these probably come as no surprise. But did you know there could be financial ramifications if you fail to file past due taxes? In particular, failing to file past due taxes could disqualify you from getting a personal or 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:
True, your lender will probably want to review your company’s financial statements, but this does not preclude your requirement to provide tax returns with your loan application.
Depending on your business structure, your tax return might also include a balance sheet in addition to your income and losses. This applies specifically to partnerships and corporations. One of the first things my firm does when taking on a new client is to compare the balance sheet on the last completed tax return to the balance sheet in the accounting software. Often, we see significant differences between the two.
In the case of sole proprietorships, which file a Schedule C, we look for a depreciation schedule. This schedule lists the depreciable assets owned by the business.
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.
My firm has worked with business owners who are impeccable with their business finances, but their personal finances are much less organized. Namely, they don’t file past due taxes. These well-meaning business owners think as long as their business affairs are in order, they can let their personal tax returns slide. This might be a huge mistake, however.
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 any shareholder who owns more than 20% of the stock in the 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.
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 afraid they won’t be able to pay the amount of tax they owe.
Working with a qualified accountant or bookkeeper throughout the year can help you overcome both the overwhelm and the fear. 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 reserved in a savings account to cover any taxes you will owe at the end of the year. Finally, many accountants and bookkeepers will help business owners complete loan applications, making even that process less daunting.
Past due taxes can derail your plans for your business if not addressed. If you have not filed your tax returns for several years, make it a priority to file as soon as possible, especially if you are considering applying for a business loan at some point in the future. Making sure you file past due taxes now will save you the stress of having to deal with them when you really need a loan.