Business Tax Debts & Legal Options for Business Owners

If you are an owner of a small business that owes tax debts, you may worry about whether your business can survive. These debts can compound at a rate of up to 14 percent, which means that your burden may mount quickly. The good news is that many business owners can work out a solution with the IRS that saves their business and minimizes the penalties and interest that they need to pay. You should make sure to communicate consistently and candidly with the IRS, even if it does not aggressively pursue collection efforts. Sooner or later, it likely will try to collect on the debt, which may involve garnishing your wages, levying from your bank account, or placing a lien on your home. The IRS does not need to go to court to shut down your business and seize your assets. It generally needs to send you a demand letter, although sometimes not even this step is required.

Communicating with the IRS

You should be aware that the IRS process moves slowly. You likely will have some time to consult an attorney or another tax professional about your options before the IRS starts assigning actual collectors to pursue your debt. (In the meantime, though, you may need to deal with computerized collection efforts, which can be intimidating and time-consuming as well.) As noted above, you should be truthful when you are interacting with the IRS. On the other hand, you usually do not need to divulge all of your financial information. The IRS does not have the power to force you to disclose information unless it serves you with a summons.

Strategies to Repay the Debt

The IRS rarely shuts down a business unless it owes payroll taxes. As a general rule, agency action results in a shutdown much less often than it is threatened. Similar to an individual who owes tax debt, a business may be able to arrange an installment payment plan or an offer in compromise. An installment payment plan essentially allows you to pay off your tax debt in monthly segments, although interest and penalties will continue to pile up during the course of the plan.

In other situations, you may be able to secure a discount on your tax debt by making an offer in compromise. This involves explaining why your business cannot pay the full debt, based on its dire financial situation, and asking the IRS to accept a reduced payment. The IRS may be willing to accept an offer in compromise if it does not believe that it can eventually collect the full amount of the debt.

Business owners may be able to consider a few other options as well. While tax debts usually cannot be reduced or eliminated by filing for bankruptcy, you may want to explore the limited exceptions to this rule in case they apply to your situation. Or, if you have very few alternatives, you may want to ask the IRS to place your business on uncollectible status. This will result in a temporary respite from collections, but it will not reduce the tax debt that you owe or prevent interest from accumulating on it. You can secure uncollectible status only if your business is facing serious financial difficulties.

Last reviewed October 2024