How do I know if my business is in tax trouble?
Entrepreneurs justifiably take great pride in their business. But this pride often gets in the way of a clear understanding of the risk of continuing to operate into a storm of IRS trouble. The IRS comes down hardest on businesses with tax troubles, and owners and management are usually implicated as well.
Here are a few warning signs of tax troubles:
1. Using employee tax withholding money to pay other creditors. Falling behind on employment taxes is a vicious circle, with interest and penalties causing the liability to increase substantially to the point of making a planned repayment difficult. Additionally, ownership and management can be held personally responsible for the unpaid taxes (this is called a trust fund recovery penalty). If the business can’t repay the taxes, the IRS will seek to collect from the personal assets of the individuals.
2. Failing to make quarterly estimated tax payments. Many business owners, especially those that are self-employed, are responsible to account for their own income tax payments. Employees have a withholding mechanism; owners often do not. The cash crunch from the business impacts the ability to pay personal living expenses, resulting in income taxes being left out of the household budget. Groceries and mortgages need to be paid, but the IRS is delayed. The IRS is as important as the mortgage; after all, what good is it to pay your mortgage while giving the IRS a claim on your house?
3. Delaying the filing of tax returns. If you can’t pay, not filing is not the answer. The money is still due, and filing late only adds penalties to the amount owed. It also puts off addressing the problem, compounding the issue. And the IRS tracks unfiled returns, especially in employment tax cases. Not filing is a great way to get the attention of the IRS and have them assign a local Revenue Officer to investigate.
4. Plowing retirement money into the business, and using it to pay personal living expenses. The hope is that tomorrow will be better. And it might be. But the creditors that are being paid with the retirement money (suppliers, etc.) have no claim to it – in most situations, retirement money is an asset that no creditor can reach. Except the IRS.
5. Unmanageable credit card debt. Before the retirement money goes into the mix, credit cards are often maxed out. Stop at this point; the situation is already unmanageable. Do not dip into the retirement money. And do not pay the credit cards before paying the IRS. The credit cards are at the bottom of the barrel – they can be eliminated in bankruptcy, and many times they will end up writing off the account. Not paying credit cards is uncomfortable, but not as uncomfortable as the IRS can make things.
These are tough situations. A failing business brings the stress of obligations to employees and personal family members. But the longer it goes unchecked, the deeper it gets.