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Filing Back Taxes for Your Business? Here's What You Need to Know

ADP Contributor ADP Contributor

A businessperson sits handling papers at a kitchen table.
  • If your business owes back taxes, the sooner you address the issue, the better. The IRS can charge interest and penalties.
  • Simply filing your late returns can reduce the penalties even if you can't yet pay the back taxes.
  • Prevent facing back taxes by forecasting your tax bill at the start of the year and using separate bank accounts for paying taxes and building an emergency fund.

If your business has fallen behind on its taxes, it's essential to move quickly to avoid being assessed additional penalties and fines. Fortunately, catching up and filing back taxes for business returns is not as scary or complicated as you may think.

If filing back taxes is necessary for your organization, here are some tips to consider.

Why it's important to file back taxes right away

The IRS charges interest and penalties on your back taxes. If you haven't filed your return, the IRS charges a 5-percent-per-month failure-to-file penalty up to a maximum of 25 percent of your unpaid balance. If you file your return but owe back taxes, the IRS charges a 0.5-percent-per-month failure-to-pay penalty up to a maximum of 25 percent of your unpaid balance.

The longer you wait to file back taxes, the more you owe. For example, if you owe $100,000 in back taxes and haven't filed your return, every month you wait costs you $5,000 ($100,000 x 5%). If you filed your return, every month you wait would only cost you $500. Both penalties max out at 25 percent of your unpaid balance, so $25,000.

In the worst-case scenario, not taking care of your back taxes can lead to serious problems. The IRS could place a lien against your property, like real estate and bank accounts, and it could eventually seize these assets for repayment.

The tax lien would show up on your credit score, restricting your ability to qualify for business loans, lines of credit and credit cards. The government could also seize your passport if you aren't paying off the back taxes. People who are intentionally trying to hide and avoid their debt through tax evasion could even go to jail.

How to file back taxes

Larry Lawler, CPA and national director of the American Society of Tax Problem Solvers, has step-by-step advice to help you get through the process of filing back taxes.

1. Determine what wasn't filed

Your first step is to figure out exactly which returns you've missed over the years. You can request a transcript from the IRS that will list your history so you can know what you've filed and what you've missed. Lawler says that businesses must pay special attention if they've fallen behind on submitting their payroll taxes.

"The IRS has a lot more power to take money from your bank accounts for payroll taxes since you took that money on behalf of your employees," Lawler says. "If you're in this situation, I recommend you contact a payroll company immediately to fix things."

2. Determine what needs to be filed

Once you know what returns you've missed, your next step is to figure out which ones you have to file to become compliant again.

"You only need to file missed returns from the past six years," according to Lawler. "Anything earlier than that is outside the requirements of IRS Policy Statement 5-133."

3. File necessary returns to get compliant

Lawler then recommends that you file your missed returns as soon as possible, even if you don't have the money to pay your back taxes. Remember, the failure-to-file penalty is much more severe at 5 percent per month. But if you file, the failure-to-pay penalty is only 0.5 percent per month.

Lawler also notes that the IRS has a 10-year statute of limitations for unpaid taxes. In other words, they cannot collect a tax debt that is more than 10 years old. But the countdown only starts once you've filed a return.

"If you owe taxes from 15 years ago but never filed a return, you still owe these back taxes," Lawler says.

4. Arrange to pay your back taxes

Once you're compliant, it's time to come up with a plan to pay your back taxes. The right approach depends on your financial situation.

If you've got the money on hand, you could just write a check to pay everything off. If you don't, the IRS may let you set up an installment plan to break your tax debt into smaller payments. You and your tax professional may also be able to negotiate a reduced settlement.

If you're struggling and can't pay anything, you can request a "currently not collectible" status, meaning that the IRS will not pursue you for payment until your situation turns around. Generally, this status is reviewed every two years.

5. Work to reduce penalties

Lawler wraps up the process by looking for ways to reduce any penalties that his client has accrued.

"If it's your first time being late on taxes, you may be able to get all the penalties waived, especially if you have a good excuse," he says. "For example, you had a major illness and that's why your business struggled."

When filing back taxes for business reasons, consider working with a tax professional throughout the process. The potential tax savings and penalty abatement will make their fee a smart investment.

How to avoid future issues with back taxes

Once you settle your current tax issue, plan how you'll avoid these problems in the future. Some strategies you can use include:

  • Forecast your tax bill to start the year. You can predict how much you'll owe based on your revenue forecast and the previous year's tax bill. Your tax preparation service could also give you estimates. If it looks like your revenue will be higher, be sure to save more based on your expected tax rate. If you're worried about falling short, you could save extra on top of your estimated taxes to build a buffer. Whatever you don't give to the IRS will be available to invest in your business next year.
  • Create a separate bank account for unpaid taxes. Keeping your unpaid taxes in the same account as your general funds might blur the line, leading you to spend the money accidentally. Open another bank account that's only for storing unpaid taxes.
  • Track key tax dates. Map out the due dates for your taxes on your calendar. If you owe quarterly estimated federal or state income taxes, the dates are usually April 15, June 15 and September 15 during the year and January 15 of the following year. If you have employees on payroll, you typically need to submit those monthly or semi-weekly, depending on how much you need to submit. The IRS tells you which schedule to use at the end of each year.
  • Treat taxes like a year-round issue. If you wait until tax season to calculate your bill, it could be too late to find out you haven't saved enough. By focusing on this work every month, you make the tracking easier and catch issues sooner. It also can help you proactively identify tax credits and deductions you might have overlooked.
  • Work with a professional service. A payroll provider could automatically calculate, withhold and pay the taxes you owe for your employees. Since the IRS goes after unpaid payroll taxes most severely, investing in a professional service could be a wise investment. You could also use tax software or a bookkeeper to help track and submit your income taxes during the year.
  • Build a business emergency fund. During good times, save part of your profits in an emergency fund. Aim to build six months of your operating expenses. If you run into a slow stretch, you could tap into the emergency fund instead of spending your unpaid taxes.

For more planning support, our year-end resources for accountants can give you a checklist, calendar and other tools to aid with your future tax needs.