Filing back taxes may become necessary for your organization — here are some tips to consider.
If your business has fallen behind on its taxes, it's important to move quickly to avoid penalties and fines. Fortunately, catching up and filing back taxes for business returns is not as scary or complicated as you may think.
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.
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 see 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 actually 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. "The IRS charges a substantial failure-to-file penalty when you haven't submitted a return. It's 5 percent of your unpaid taxes up to a maximum of 25 percent," Lawler says.
"While the IRS also charges a penalty on unpaid taxes, it's only 0.5 percent per month of your unpaid taxes up to a maximum of 25 percent."
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."
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 simply 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 Currently Not Collectible status, meaning that the IRS will not pursue you for payment until your situation turns around. Generally, Currently Not Collectible 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.