Logan Allec, CPA is the founder, owner, and president of tax relief services company Choice Tax Relief, which serves clients nationwide.
For most small business owners, success is typically followed by a substantial tax bill.
And unlike everyday Americans working a W-2 job, business owners don’t just have to worry about their regular individual income tax liability when it comes to the IRS. They have to deal with other federal taxes such as self-employment taxes, corporate income taxes, payroll taxes and excise taxes.
Here are five things every business leader should know about these business taxes. Keep in mind, of course, that your state may have different rules concerning your state business tax debt.
1. IRS business tax debt expires after 10 years, just like personal tax debt.
If you have tax debt, or at least some general awareness of IRS practices and procedures, you may be aware that Congress has set a 10-year statute of limitations—essentially a time limit—on how long the IRS has to collect a tax debt after it’s been assessed.
But does this 10-year time limit apply to business tax debt?
The answer is yes. In most cases, the IRS only has 10 years to collect a business tax debt after it has been assessed. But you can be assured that the IRS will do everything in its power, from levying your business bank account to issuing accounts receivable levies to your customers, in order to collect before its time is up.
Just like with individual taxes, however, various tolling events, such as filing for bankruptcy or submitting an offer in compromise, can extend the IRS’s 10-year time limit.
2. The same tax relief options available to individuals are available to businesses.
If you have business tax debt, you may be wondering if the same tax relief options you’ve heard about on the radio—”Act now to take advantage of the IRS Fresh Start Program!”—are available to you as a business owner.
Fortunately, the IRS provides businesses with the same opportunities as individuals to get back on track with their taxes.
In fact, the IRS even has specific forms for the businesses to use when it comes to dealing with their tax debt. One example is the Form 433-B (OIC), which corporations, partnerships and other kinds of businesses complete as part of their business offer in compromise application.
3. The IRS’s six-year rule on filing delinquent returns applies to corporate returns, too.
Years ago, the IRS issued Policy Statement 5-133, which establishes that the IRS will generally not pursue delinquent tax returns that are more than six years old.
This means that even if, say, your C corporation hasn’t filed its tax return (Form 1120) in 10 years, the IRS will generally still consider your corporation to be in filing compliance, making it eligible to enter into some kind of resolution for its tax debt, such as an installment agreement or offer in compromise—if it simply files the last six years of returns.
Now, the IRS can go back longer than six years, but the IRS employee working your case would likely have to get approval from a higher-up to do so.
4. The IRS takes payroll taxes very seriously—and may go after you personally for them.
The IRS takes payroll taxes very seriously. And in particular, the IRS takes the “trust fund” portion of a business’s payroll taxes—that is, the payroll taxes the business withholds from its employees’ paychecks, such as their federal income tax withholding and their share of Social Security and Medicare taxes—extremely seriously.
This is because even if a business withholds these taxes from their employees’ paychecks but does not remit the funds to the government, the IRS still has to give credit to these employees for their withholdings.
In a sense, then, a business skirting its payroll tax deposit obligations hurts the government twice: once, because the withheld funds were not remitted to the government, and twice, because the government still must give the employees credit for these withholdings.
A business owner’s failure to remit their employees’ withholdings to the government is so serious that the IRS can go after the owner personally for these unpaid taxes. I’m not just talking about piercing the corporate veil here; the IRS can actually make a separate assessment for these unpaid trust fund taxes against the owner via the Trust Fund Recovery Penalty (TFRP) process.
And it’s not just owners who can be on the hook for the TFRP. Anyone the IRS deems a “responsible person” for the payroll tax remittance failure could possibly see this penalty assessed against them.
5. The IRS can let your customers know about your tax problem.
When your business has overdue tax debt, the IRS has no problem doing what it believes it needs to do when it comes to collecting.
One of the tools the IRS has in its business tax debt collection arsenal is the accounts receivable levy, through which the IRS sends notice to your business’s customers informing them that instead of paying your business what they owe it, they should instead remit funds to the IRS.
Although the IRS’s intent with accounts receivable levies is simply to collect an unpaid tax debt, the reputational effect on your business of your customers knowing about its tax problems can be even more devastating.
How does the IRS know who your customers are? There are internal tools the IRS can use, but the first thing it does is look at which other businesses issued your business a 1099 last year.
Owing business tax debt is a manageable situation.
Although owing business tax debt to the IRS is not an ideal situation, it is a surprisingly manageable situation if you know what you’re doing (or hire someone who does). Creating a strategic game plan to deal with your business tax debt involves understanding how the IRS treats such debt, when it expires and what relief options are available to you and your business. And after you’ve negotiated your existing business tax debt, be sure to put safeguards in place to prevent future tax issues.
You have enough to worry about in your business, so arm yourself with the knowledge you need to get the IRS off your back—and don’t let them jump on again!
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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