Taxes can be the death of your business. Or rather, a failure to understand or pay taxes can be the death of your business. If a liability with the Internal Revenue Service is not addressed quickly, the Collections Division can be rather aggressive. The IRS can levy bank accounts and/or accounts receivable, garnish wages, or seize assets.
So, some time has passed and you’ve received no word from the IRS. You’re not worried, right?
Jason Peckham, Director of Business Development for 20/20 Tax Resolution
in Broomfield, Colo., cautions business owners with such a liability to take it seriously, even if the IRS does not seem to be chasing you right now.
“The IRS can be slow to acknowledge and deal with liabilities. A taxpayer could accrue a liability in 2008, but [the IRS] might not get to it until 2010,” Peckham said. “Sometimes it takes two or three years before the IRS figures out what’s going on – but once they do, they can move quickly. That can fool taxpayers into a false sense of security. They might think ‘I accrued that liability two years ago, but the IRS hasn’t done anything yet. They’re not interested in me. I’m going to be okay.’ Unfortunately, a business that ignores notices or other communication from the IRS can be quickly levied out of existence.”
If you operate as a limited liability company or corporation, you might think that your business insurance protects your personal assets from the tax man. However, the Trust Fund Recovery Penalty
provisions of the Internal Revenue Code allow the IRS to pursue individuals in a company with a tax liability, if the IRS finds those individuals to have been "responsible" and "willful" in the non-payment of taxes. A person deemed “willful and responsible” by the IRS can be assessed with a portion of the original liability. The TFRP allows the IRS to file liens and go after personal assets, including levying bank accounts or even seizing personally-owned property.
If you happen to be unlucky enough to get audited or fail to pay your taxes, you could quickly accrue a $10,000, $50,000 or $200,000 tax liability. There are some actions you can take to resolve the situation. Initially, the business needs to get back into compliance. All returns must be filed with the IRS. All current federal tax deposits must be made in full and on time. Essentially, a line in the sand must be drawn.
Peckham advises that businesses owing taxes to the IRS should act proactively to address the issue. Maintaining communication with the IRS is important. Business owners should be prepared to provide financial information to the Collections Division of the IRS. A proposal, one based upon what the business can actually afford, should be submitted to the IRS Revenue Officer. “You don’t want the IRS to frame the issue. You want to provide the jumping-off point for the negotiations,” said Peckham.
No matter how the liability came into existence, it is important that you cooperate with the IRS in a forthright manner. Peckham says, “If you misrepresent your situation [to the IRS], you’re likely to get caught. Revenue Officers have relatively easy access to a lot of information. Once you’ve been caught, you’re probably not going to get the benefit of the doubt in any situation. The IRS does not have to give you an Installment Agreement. They do not have to give you an Offer in Compromise. Instead, they are going to keep pursuing levies of your bank accounts and accounts receivable until you are no longer in business.”
Given the level of complexity of the IRS and the stakes involved, a business owner may want to consider representation before the IRS. “Essentially, it’s about the comfort level of the owner,” said Peckham. If the owner is comfortable with the negotiation process, the amount of time involved, and confident the amount the business will repay on a monthly basis is reasonable, there is probably no need for a representative. On the other hand, if the owner begins to feel uncomfortable with the process, it’s probably a sign that representation is needed.”
Tax resolution services, like 20/20 Tax Resolution, can help after you have accrued a tax liability. However, business owners should beware of tax resolution companies that make promises of settling with the IRS for “pennies on the dollar.” Several companies with commercials promising settlements with the IRS for “pennies on the dollar”
have been sued by various state attorneys general for deceptive advertising. “Make sure to research the company you are hiring,” said Peckham. “If it sounds too good to be true – you know the rest.”
Ultimately, it is easier to avoid a liability with the IRS than negotiate a resolution on the back end. Peckham suggestions that “You should have a checklist for starting up your own business
, and making sure you understand how taxes work should be on that list.”
In 2009, more than two million businesses and individuals owed money to the IRS. The most important thing to remember is there is always a resolution, many times more than one.