(and what to do if you can’t pay your taxes)
Darla thought her yoga business was going to fold last year when the pandemic hit. The building she rented shut down. No one could come to classes. And her cash flow came to a screeching halt.
So she did what all great entrepreneurs do. She improvised and pivoted.
During April and May of 2020, she was busy building, creating, and innovating at a breakneck pace.
She got approved for socially distanced outdoor yoga classes at her friend’s wedding venue site (that was also closed due to wedding lockdowns). She also started Zoom yoga classes for those who couldn’t attend in person.
The problem was that Darla wasn’t ready for what happened next: she became wildly successful in record time!
When “Success” Can Be a Problem…
Why was Darla’s success a problem?
Because she didn’t realize she needed to increase her quarterly tax payments. So when Darla’s sister did her taxes for her earlier this year, she had grim news for her sibling:
“You have a 5-figure tax bill that’s due on April 15.”
And since Darla had plowed most of her earnings back into the business, she didn’t have the cash to pay.
The “Tale of 2 Businesses”
With 2020 being perhaps the oddest year on record in recent history, many small business owners are in for an unusually large tax bill as a result.
And it’s happening for a variety of reasons.
On the one hand, thousands of business owners have done unexpectedly well, just like Darla.
For example, gross alcohol sales increased about 20% over the last year. While people drank away their sorrows and stress, liquor stores and many other small businesses did incredibly well.
On the flip side, sadly, thousands of businesses closed or suffered huge setbacks.
Many struggling small business owners delayed or stopped making tax payments along the way to keep their businesses afloat.
So even though their business did not thrive, many small business owners will still face a huge, unpayable tax bill this year.
This was the “tale of 2 businesses” in 2020.
Whether you benefitted from COVID restrictions to produce larger-than-normal sales, have past-due taxes, or simply get slammed by the IRS with an unexpectedly large tax bill…
You’re not the first business owner to be in this situation.
The good news is, there’s no need to fear the IRS monster. In this article, we’ll shine some light on how the IRS deals with these cases, what they can and cannot do, and solutions you can explore if you get into trouble.
Let’s start with…
Why You Don’t Need to Fear the IRS (how they really work)
Aside from perhaps the Mafia, no one has more power to collect past due payments than the IRS.
They can clear out your bank account with the push of a button like a digital bank robber, seize your home, or padlock the doors on your business — in some cases, with no warning at all.
The good news is, these nightmare-inducing threats to the fruits of your hard labor are NOT wielded lightly. The IRS doesn’t happily go around taking people’s money, homes, and businesses.
Remember, at the end of the day, they simply want to get paid what they’re owed. So you can count on them taking action that’s going to lead to the highest likelihood of that happening.
That being said, forcing a business to close is actually a sign of failure for the IRS, because auctioning equipment doesn’t bring in much (usually not enough to cover the costs of the process to seize, store, and sell it… never mind the actual taxes owed.)
They would rather work with you to stay open and make payments on your tax bill. Or even reduce it. Willie Nelson, the country singer, famously settled a $32 million tax bill for just $9 million in 1994 after 14 years of being hounded by the IRS.
Who Does the IRS Really Go After, and For How Much?
If you’re owed money in your business, you’re going to go after the biggest fish first, right?
The IRS works the same way. To them, the “big fish” are people who owe more than $50,000 in income taxes. They also go after payroll taxes of any amount. If you owe less than $50,000, you’re a lower priority, and will likely only be hounded by mail and phone.
For cases where someone owes more than $50,000 (or owes payroll taxes), the IRS may assign a “revenue officer,” which are the elite collectors to be both feared and respected for their powers. They’ll show up at your business or home after hours, unannounced, and start grilling you then and there (if you allow it.)
If this happens, don’t try to give answers right away. Say that you need to speak with your accounting team and get your info together.
Remain calm (don’t curse them out, no matter how tempting it might be). Make it clear that you intend to deal with the situation, and tell them you’ll meet them at the IRS office within a week or two. Don’t make any financial promises you can’t keep.
Actions the IRS Can Take
If you’re behind on payments, the IRS will ask for a list of everyone who owes you money and the name of your bank so they know where to go to seize your assets.
They’ll ask for your “necessary living expenses” in order to determine how big your payments can be. They expect you to live a minimalist lifestyle until your debts are paid. Don’t underestimate this number, and also don’t expect to get away with a new Corvette or trip to the Bahamas.
After they analyze your finances, a revenue officer has multiple options, including:
- Demanding full payment (if they believe you can make it)
- Ask you to sell non-essential assets
- Propose an installment agreement
- Ask you to apply for a loan
- Suggest you submit an “offer to compromise” for less than the balance due
- Start seizing your assets
- Report you as “currently not collectible” if they can’t find enough assets or income for a reasonable payment. In this case, they may suspend collection for up to 18 months and then check back in on your financial situation.
- Close down your business (this is a last resort)
We’ll go over options available based on your situation below. First…
Does Your Business Entity Protect Your Personal Assets From The IRS?
It depends on your entity structure and the type of taxes owed.
Sole Proprietors have no protection at all. There’s no distinction between your business and you, so the IRS can seize almost anything you own.
With Partnerships and LLCs, the IRS can go after your share of the property owned by the company, as well as the personal assets of any general partner for 100% of a tax debt of the partnership.
If your business is Incorporated, you may have some protection on the personal side from corporate tax bills. If payroll taxes are owed, the IRS can go directly after your personal assets.
On the flip side, because the entity is separate from its owners, they can’t seize corporate assets to pay personal bills of its shareholders (unless you’re not following corporate rules and purposely using the corporation to keep assets away from the IRS.)
What Are Your Options If You Get a Monster Tax Bill?
Your options depend on your situation.
If you owe a small amount but can’t pay it in full, look into setting up a payment plan. The minimum payment is $25, and you can work with the IRS to set up the best plan for you.
If you receive a true monster tax bill that you have little hope of ever paying, you still have 2 options.
The first is an Offer in Compromise, where you negotiate to pay an amount lower than what you owe.
The second is Bankruptcy. If this is a possibility for you, make sure you work with an experienced bankruptcy attorney.
Regardless of the option you choose, the single most important thing you must do is stay in touch with the IRS. Ignoring them or not communicating is the worst thing you can do. Not only will you rack up penalties and fees, but you risk facing the more severe consequences here.
Remember, the most important thing for the IRS is to get paid. They’ll be patient and work with you if you communicate and work with them.
Always See If You Can Decrease Your Taxes
Regardless of your situation and options available, you can always look at your tax strategy to see if you can decrease your bill.
For example, you can submit amendments of past tax returns up to three years later. So if you haven’t had a review of your taxes in the last three years, a great strategy is to get get a 2nd opinion from a great CPA.
Often this three-year review will uncover tax savings missed the first time around. , and do it. Our members have found thousands of dollars with this one strategy (including Garrett Gunderson, our Chief Wealth Architect’s $55,596 refund check a few years back.)
We’ve found over the past decade that 93% of business owners are overpaying on taxes. We believe in paying our fair share of taxes, but there’s no need to be tipping Uncle Sam with hard-earned dollars that could stay in your pocket.
We offer our clients dozens of strategies that could save thousands now, and every year moving forward.
One of our clients, Dr. Gandolfi, didn’t know about one special rule that would allow him to save $20,000 extra per year in taxes… including $102,000 the first year.
And we’re able to help our coaching clients recover an average of $4,117 per month — or $49,404 per year.
If that sounds like something you’d like, watch out for the reopening of our 2021 Tax-Cut Package in just a few days. It gives you instant access to all the tax-saving strategies, plus you get a 3-year tax review from one of our accredited network CPAs.
Don’t fear the IRS boogie monster. Or a massive tax bill. Remember, you have options – you just need the right information and team to guide you.
That’s it for this week.
Build the life you love,
The Builders at Wealth Factory