Knowing Your Options Will Help You Get Through Tax Time
For some new small business owners, their first tax season as an entrepreneur can be quite a shock to the system.
All too often, they find that once they wrap up all of the tax preparation paperwork, sort out the business’s deductions, and actually start doing their taxes, that they are going to owe the IRS more than they had thought possible.
If this sounds like your situation, do not panic, as this is common.
The fact is that many new businesses owe taxes, and the Internal Revenue Service knows this. Contrary to common belief, the IRS will work with most business owners to make their tax payments more comfortable for their businesses.
But, since IRS compliance is not a guaranteed thing, it helps if you know all of the options available to you when you owe taxes that you simply cannot afford to pay on time.
Option #1 – File an Extension
If you are a sole proprietor and you have suffered a hardship that has caused you to be financially unable to pay back your taxes in full by the due date, then filing Form 1127 may help.
Form 1127 is the IRS’s Application for Extension of Time for Payment of Tax Due to Undue Hardship, and it can help in cases where the business owner may have suffered a debilitating illness, a death in the family, or some other extreme circumstance.
It is still important to be aware that filing the form does not grant you an automatic extension; there is an approval process, and requirements must be met in order for the extension to be granted.
Option #2 – Request a Repayment Plan
The IRS usually has no problem approving repayment plan requests, but it does require different criteria, based on how much you owe. If you owe less than $25,000 in taxes, then you can file Form 9465 to request a repayment plan that fits within your budget, and you will not be required to provide the IRS income documentation.
If you owe more than $25,000, then you will be required to provide income documentation and anything else the IRS asks for, before you will be approved for a repayment plan.
Option #3 – Request a Settlement Amount
Requesting a settlement amount on the taxes your business owes is usually a last-ditch effort to clear the debt, because this can be detrimental to your credit rating. However, if you have suffered a severe hardship circumstance, or you just do not have the ability to pay the taxes, then this may be an option for you.
A settlement amount will allow you to pay less than the accrual of your current balance, penalties, and interest, but there are strict requirements that must be met before a settlement is granted.
Perhaps most importantly, staying current with your annual tax obligations will help you obtain the solution you need from the IRS. Avoiding the issue, or simply refusing to file your taxes because of the amount your business is going to owe, is never a good idea.
Once you are approved for an extension, a repayment schedule, or a settlement, it is very important to satisfy your agreement as it is set, or the IRS could cancel the agreement and demand the full amount immediately due.
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