Americans fail to pay $441 billion in taxes each year. Many of these Americans are small business owners.
Tax debt is especially serious for those who own their own business. Threats from the IRS can be devastating.
It’s easy for tax debt to get out of control and for business owners to bury their heads in the sand. If you’re a business owner and wondering about the reasons for the IRS closing a business, we have a guide for you.
Keep reading to learn more about when the IRS can seize business assets and what to do if you’re in trouble.
Reasons for the IRS Closing a Business
As a small business owner, it’s understandable to be concerned about the IRS shutting down your business. After all, you’ve put countless resources and long hours into your business not to mention the personal sacrifices you’ve had to make.
The last thing you want to think about is the IRS taking it all away from you. The truth is, there are some circumstances that can lead to the IRS shutting down your business.
The good news is, not every situation involving tax debt will have such a dramatic outcome. And even if the IRS is threatening to shut down your business, there is hope, and steps you can take to mitigate the situation and save your business.
The biggest thing to remember is that being proactive about your business debt is key. If you owe taxes to the IRS, you should never ignore them.
Let’s take a look at some of the noncompliance issues that can lead to the IRS taking a closer look at your business and tax debt. Common issues you want to avoid include:
1. Failing to pay your taxes on time
2. Failing to file tax returns
3. Filing tax returns late
4. Exhibiting a pattern of owing taxes year after year but failing to file in a timely manner
5. Payroll tax debt
Other Potential Penalties
Certain kinds of business tax debt like payroll tax debt can be worse than just owing back taxes. Payroll taxes are handled on behalf of your employees. When you fail to pay those taxes to the U.S. Treasury, it can be considered theft.
This is because a business is considered a delivery agent of those funds rather than the owner of them in the eyes of the IRS. In situations like these, business owners can face serious repercussions.
You can incur additional fees and penalties on top of the money you already owe. If you fail to pay, you could even face criminal charges and prison time. This can occur if you are convicted of willful failure to comply with federal employment tax laws.
Things have to be severe to reach this point. There is plenty of time to consult a tax professional to settle and resolve your business tax debt before facing these types of consequences.
Protecting Your Small Business
Even if you owe business taxes to the IRS, there are things you can to do protect your business. There are also rules in place to protect your business from being shut down by the IRS.
It takes time for the IRS to go through the process of seizing your business and assets. These are usually extreme measures that don’t happen often. You’ll have plenty of warning before the IRS takes such drastic measures.
You can work with the IRS and a tax professional to protect your business.
Debt Resolutions Options
The IRS has to consider other options for collecting tax debt before they take steps to seize your property. These include payment plans and offers in compromise.
This means that as a business owner if you owe more in taxes than you can pay in full, you have options including installment agreements, partial payment plans, and making an offer in compromise. We’ll go into more detail about these later.
The Fourth Amendment
The IRS is limited in what they can do to seize your assets by the Fourth Amendment of the U.S. Constitution. The IRS must have your permission or a warrant ordered by a court of law to enter your business or seize your business assets.
The IRS can only seize items from your business that have equity. They can’t take anything from you that will have no net recovery for them.
For example, if you have a loan on your property that is the same in value, the loan has no equity. This means the IRS couldn’t recover any funds to put towards your tax debt so they can’t seize your property.
The IRS can only seize business assets that are greater than a protected threshold. The first $4,560 of your business assets are protected from seizure. Any assets over the amount are subject to being seized by the IRS.
Some small businesses may not have enough assets to be subject to asset seizure.
The Benefit of Time
Fortunately, the IRS isn’t known for its speed so you have time to develop a plan. You might get tax bills and phone calls early on, but it can take months or years before the IRS confronts you.
This is because the IRS is limited when it comes to personnel, and they try everything else before they assign a real person to your case. IRS threats are often just that – threats. Rarely do their threats to shut down a business actually materialize.
What to Do If You’re In Trouble
If you’re a small business owner who owes the IRS and you’re afraid of losing your assets and your business, there are steps you can take to make things right. The first thing you should do is become compliant.
File any and all business tax returns that you should have filed but haven’t yet. Pay any taxes that you haven’t yet paid. Be sure you’re up to date on what you owe the IRS.
After you’ve paid off your overdue taxes, make sure you pay on time every year. Having a good relationship with the IRS is essential to the success of your business. A gesture of good faith goes a long way and a pattern of broken trust can cause you a lot of problems.
Avoid Pyramiding Unpaid Taxes
Pyramiding your tax debt is one of the worst things you can do as a small business owner. Pyramiding is when you fail to pay your taxes every year you owe.
The IRS won’t look favorably upon your company and you won’t be in a good position with the IRS employees who will work with you to resolve your debt.
Don’t Miss Deadlines
Every American knows that taxes are due on April 15th. Both your returns and your payments are due on this date. The IRS takes its deadlines seriously.
If you owe taxes and are working with an automated collection service or a revenue officer, you’ll have additional deadlines to meet in order to stay compliant. Take these deadlines seriously to show a good faith effort to remain compliant with the IRS.
For example, if the IRS sends you Form 9297 requesting your financial statement and unfiled returns as part of negotiating repayment terms, it’s important that you return the form and provide any necessary information before the deadline provided. If you aren’t willing to cooperate with the IRS, they aren’t going to be as willing to settle or agree to a payment plan. You could also end up losing your assets or your business.
Stay in Touch with the IRS
If you’re threatened with the loss of your business and assets, the most important thing you can do is stay in touch with the IRS. While ignoring them might seem tempting and you might get them to go away for a while, the IRS always comes back for what it’s owed – often when it’s especially inconvenient.
Ignoring the IRS can lead to penalties, increased interest, and even the loss of your business. The longer you ignore your tax debt, the larger it will grow. Tax debt is compounded.
In most cases, you should fully cooperate and provide any financial information the IRS asks for. However, sometimes you don’t want to disclose more than you have to. You may be served with a summons requiring you to disclose information about your finances and assets.
If you get to this point, it’s a good idea to have an experienced tax attorney on your side.
Negotiating a Resolution
If you can’t afford to pay your tax debt in full, you should work with your tax representative to contact the IRS to arrange an alternative payment plan. Ignoring your tax debt because you can’t afford to pay it won’t make it go away.
Let’s look at the most promising options for resolving your tax liability as painlessly as possible.
There are two types of payment plans you may qualify for. The most common is an installment agreement. With this type of payment plan, you’ll make monthly payments to the IRS for an agreed-upon amount.
The amount will be determined by your income, assets, and expenses to ensure the payment amount is reasonable.
In some cases, you may be eligible for a partial payment plan. This type of payment arrangement is similar to a standard installment agreement but the monthly payments are lower because of your circumstances.
If things aren’t looking so good for your business, you can request to be placed on an “uncollectable” status. If the IRS agrees to this, they will suspend collections activities for a period of time.
You’ll still owe your tax debt and penalties and interest will continue to accumulate but the IRS won’t pursue you during this time.
Offer in Compromise
Businesses can make a deal with the IRS to settle tax debt for pennies on the dollar by making an offer in compromise. This is a formal, time-consuming process but it is often worth the effort.
As a business owner, you’ll provide information to the IRS about your financial situation and request they accept a portion of what you owe. If the offer is equal to what the IRS believes it can collect from you in a reasonable amount of time, they’ll accept your offer.
If the IRS believes they are unlikely to collect more from you in the future, they’ll accept less upfront and cut their losses. There are multiple types of payment plans available as part of this program depending on your circumstances and how much you’re able to pay.
Filing for bankruptcy can reduce or eliminate tax debt. While the rules for filing can be tricky, it’s a worthwhile last resort to consider.
If you qualify for Chapter 13 bankruptcy, you may be able to reduce your tax liability and make monthly payments. With Chapter 7 bankruptcy, you may be able to wipe your tax debt clean.
Is the IRS Threatening Your Business?
As a business owner, it’s reasonable to worry about the reasons for the IRS closing a business. If you owe business taxes and are concerned about the IRS seizing your assets or shutting down your business, don’t panic.
There are laws in place to protect small business owners and a little bit of communication with the IRS goes a long way. The important thing is to stay calm and come up with a plan of action.