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If you don’t file and pay your business taxes by the due date, you’ll owe back taxes.

Back taxes can have serious consequences for a small business:

  • Back taxes accrue interest and penalties, so your tax debt can quickly snowball.
  • If you owe back taxes, the IRS will hold any tax refund your business is entitled to until the past-due taxes are paid.
  • The IRS may create its own assessment of how much tax you owe. Because they don’t work out deductions and other tax-saving measures, this amount is usually more than what your tax preparer determines.
  • In some situations, the IRS may seize business assets to pay your back taxes.
  • If you are self-employed, any income you earn during the time the back taxes remain unpaid won’t be reported to Social Security, which can affect your retirement earnings.
  • It can be harder to get loans for your business or obtain other types of financing that require you to submit tax returns.

What Happens Next?

If you’ve failed to file your return and pay your taxes, you’ll receive a notice from the IRS that your returns are past due. Here’s what to do.

  • Don’t hide your head in the sand. It’s tempting to file away an IRS letter to deal with later, but every day you delay responding can get your business in deeper trouble.
  • Prioritize payment of back taxes. If you have to make adjustments with vendors or suppliers to free up enough money to pay the taxes, do it. The IRS can cause you greater grief than any vendor or supplier can if you don’t pay your debts.
  • Get professional help. Your accountant or tax preparer can help you deal with the back taxes and advise you on the best way to proceed. 
  • Be proactive. Respond to the IRS letter right away with the information requested. It’s important to show that you are willing to work with the IRS to handle your debts.   

What Are Your Options?

If you haven’t filed your tax returns due to an error, file the past due return the same way you would file an on-time return. 

If you haven’t filed your tax returns and you’re not ready to do so yet, file for an extension. This won’t reduce the amount of taxes you ultimately owe or the due date on your taxes, but it will give you and your tax preparer more time to get your returns in order.

If you’ve filed your business tax returns but can’t pay the full amount you owe, see if you can get an additional 60 to 120 days to pay your account in full. You can do this through the Online Payment Agreement application.

If you need more than 120 days to pay your back taxes, you may be eligible for an installment plan. This is open to businesses that owe $25,000 or less in combined payroll and other business taxes, penalties and interest, and can pay the full amount within 24 months. Apply using the Online Payment Agreement application; you’ll find out immediately whether you’re approved. If you’re approved, set up automatic debit payments from your checking account so you don’t have to worry about missing a payment and incurring additional penalties.

If you’re not eligible to use the Online Payment Agreement application, you can still apply to pay your taxes in installments. Submit Form 9465, Installment Agreement Request and Form 433-F, Collection Information Statement, or call 800-829-1040 or the phone number on the IRS notice you received.

If you can’t pay the taxes owed in 24 months, see if you qualify for the IRS’s Offer in Compromise program. This last-ditch option allows you to settle your tax debt for less than the full amount you owe if the IRS has no reasonable expectation of receiving full payment. The IRS will consider several factors, including your ability to pay, income, assets and expenses. To be eligible, you must be current with all your tax returns and you can’t be in bankruptcy. Assess your eligibility here.

Going Forward

Once your back taxes are cleared up, take steps to avoid owing back taxes in the future. Whether or not you can pay the amount owed in full, you should always file your tax returns on time going forward. Use the IRS calendar tools to make sure you never miss a filing deadline again.