Should you close your business if you owe back taxes?

Novatax comments are in green.  

Original link:

Failure is an option

Submitted by The City Wire staff on Sun, 05/15/2011 – 8:25pm.


guest commentary by David Potts

The complete commentary is available at the link above, this excerpt is tax related. 

“…The business owner has to pay the employees first or they won’t show up for work.  By now many of his vendors are placing him on COD and the banks have converted the terms of their notes to paying interest only in hopes of helping the business succeed. Although the business owner doesn’t want to do it, he will have to be late in paying his sales tax he collected from his customers or the social security taxes and federal tax withholdings he withheld from his employees’ wages.

The IRS won’t know the payment is late until after the company files the quarterly employment tax returns and then it will take at least a month or more before the IRS sends a demand for payment. Then the business owner can put off paying the delinquent taxes for at least 90 more days as long as they tell the IRS the can pay the employment taxes by then.

“Surely by then their business will have turned around,” the business owner keeps telling himself.

But business doesn’t improve and the past due balances of their taxes continue to climb. That’s the only way they can fund the business’ continuing losses.

There is one thing I have noticed about an Internal Revenue Officer, aka, the tax collector. They never smile at you when they introduce themselves. As a matter of fact, I’ve never even seen one tear up when the business owner confides to them the stress they are under from managing the business and this stress is so bad that it causes frequent fights at home with the spouse ruining any hope of a sex life.

They have heard it all before, probably with more drama than you could muster. And don’t believe Roni Deutch’s television ads. Seldom will the IRS settle your past due tax liability for pennies on the dollar. The tax collector that just introduced himself to you wants to know only one thing. Can you pay your past due tax liability, and if so, when? If you can’t, they will levy your bank account, place liens on or seize your company’s assets, and let you pay the remaining balance monthly for the next 10 years with the earnings from your next job. At this point you will be a modern day slave in service to the United States Treasury.  It’s not quite that cut and dried.  I have encountered revenue officers who are pleasant.  They are still there to solve their problem, not yours.  This article suggests that if you can’t full pay the over due taxes the day the IRS shows up they will immediately begin to levy your bank accounts and seize assets.  That’s not how it works.  You can create installment agreements to repay the back taxes, you can submit an offer in compromise to settle the debt (in certain circumstances), and you can create a partial payment installment agreement if you need more than 5 years to pay it back.  The author’s opinion mirrors most CPA’s approaches to dealing with their client’s back tax problem.  CPA’s are excellent resources for many business problems and tax filing.  They just don’t like to deal with back taxes. 

I have seen the progression of events described above over and over again during the past 25 years I have practiced as a CPA. In actuality this progression of events can take several years. The business owners I know who have marched this death march would have closed their businesses much sooner if they would have known just how deep the financial pit they dug for themselves would be. But when you are in the midst of a fight for survival, belief is powerful motivation to stay the path. But belief doesn’t turn a business around. Profit does.

If your business is somewhere on the path described above, and I know many businesses are, you need to ask yourself, “Is it time to close my business?” Nobody can make this call but you. Business owners that have traveled this path to the end would tell you sooner is better than later.

Just keep in mind, failure IS an option, and is always an option in any business. But as Zig Ziglar said, “Failure is an event, not a condition.””  At least he ends on a positive note!  There are further considerations that the author doesn’t address if you close a business with overdue tax problems.  If you owe trust fund taxes when the business ceases to operate, they will be personally assessed to the owner(s).  Trust fund taxes include payroll and sales tax among others.  The solutions above still apply after you close your business as well.  But the question changes from “how much tax do you owe?” to “how much tax can you pay?”  In this scenario people often settle their back taxes for less than what was originally owed. 

  1. aljunior111
    May 17, 2011 at 10:30 PM

    Novatax, I run a consulting business and the irs lady says she will force me to close my business even though I’ve made changes that have allowed me to become profitable very recently. Do I have to do what she tells me? I told her if I close my business she will have no chance of getting paid back, but she doesn’t seem to care. thanks, Al.

  2. May 18, 2011 at 5:28 PM

    Thanks for the reply! It’s our first. Revenue Officers force people to close businesses through bank levies, receivable levies, and asset seizures. If none of those things are happening yet, she may be posturing, or she may intend to follow through with those threats. If you’ve received a Letter 1058 “final notice of intent to levy” she probably means business.

    From your comment about being profitable, we assume you mean profitable except for the back tax problem. Either way, the RO needs to understand the changes you’ve made. If you can address this problem through an installment agreement, an offer-in-compromise (OIC), a partial payment installment agreement, or other business restructuring then there is no reason to close.

    You don’t have to do what she tells you, but she will take the actions she believes are appropriate with the information she has. So communication with her is key.

    Sometimes Revenue Officers care less about getting the overdue tax paid, and care more about stopping continued past due tax accrual. It sounds like she is in this mode.

    If you have more questions, please post them, or you can call us. If you call you won’t get any sales pressure we promise! If you call please let us know you’re calling from our blog. The unknowns of your situation creates more questions than it answers. For example, are you current and compliant? Are you missing any old filings? What changes have you made? How long do you need to fix the problem? and others…

    May 11, 2013 at 5:36 AM

    Great post. I will be facing a few of these issues as

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