The Storm Is Coming
If your business is in debt to the IRS, then it’s time to batten down the hatches. The government has a tremendous arsenal of tools and techniques for collecting unpaid taxes, many of which could sink a struggling small business.
Luckily, every business has the opportunity to negotiate an agreement with the IRS, either to restructure an existing debt, or to wipe it out entirely.
Nowhere to Hide
If you owe the government a tax debt, sooner or later Uncle Sam will come knocking. Trying to ignore a tax debt is like hiding from your shadow—every time you turn around, there it is again.
You are better off initiating contact with the IRS immediately—if nothing else, you are demonstrating a desire to settle the problem as quickly and painlessly as possible. And the longer you allow your tax bill to remain unpaid, the more interest and penalties your debt will generate.
Currently, most tax debts accumulate interest at a rate of 14%, and if the IRS believes that you are attempting to defraud the government by ignoring your debt, then they might have grounds to file a lawsuit in criminal court.
By establishing contact as soon as possible, you stand to save money (and a lot of trouble), in the long run.
Congress has given the IRS the power to collect unpaid taxes in a variety of nasty ways, most notably through seizure of property and assets. That means the IRS can take your home, your savings, and any assets associated with your business.
And Uncle Sam doesn’t need a court order to close your business. The IRS has the power—guaranteed by an act of Congress—to effectively close your business at any time by seizing your equipment, and locking the doors.
That said, the IRS is known to have a bark that's worse than its bite. The agency often threatens to shut down small businesses with outstanding tax debts, but generally they are more interested in negotiating a settlement that will benefit both parties.
How Much to Pay
Here is a general rule, followed by a critical exception. You should never lie to the IRS (the penalties are very severe). However, you aren’t legally required to disclose private information pertaining to your finances or assets until you are formally served with a court summons.
Of course, it’s in your best interest to cooperate with the IRS official assigned to your case, but full disclosure can be dangerous, especially if you haven’t yet had an opportunity to fully review and audit your financial statements.
If you’re prepared to pay the IRS the full amount you owe, then you can request a structured payment plan to allow you to pay down your debt in monthly installments. However, until your debt is fully absolved, interest and penalties will continue to accumulate.
At any time, you can try to negotiate a reduced settlement with the IRS, either by conferring directly with an IRS collector, or by submitting an Offer in Compromise (OIC) request. An OIC can allow you to settle your debt for pennies on the dollar, but only if the government believes that accepting less is in its best interest.
As a last resort, if your business is in truly dire financial straights, then you can request to have your debt flagged as temporarily “uncollectible.” This only buys you time. Your interest continues to accumulate, and eventually the IRS will reappear (just like your shadow), to collect its money.
Taxes are no joke. If your business is burdened with an outstanding tax debt, then do whatever you can to begin to address the problem immediately.