The IRS can be daunting for businesses and sole proprietors that owe tax debt – federal tax liens can seriously impact a company’s ability to operate if taxes remain unpaid. However, the IRS offers options for taxpayers that need help with their obligations.
Many businesses and sole proprietors are looking for IRS debt forgiveness programs. While the IRS does not offer a specific forgiveness program, they do have solutions that can reduce a business’s tax burden or give eligible businesses more time to pay their taxes.
The IRS debt forgiveness options vary from business to business. For those available to your business, review these guidelines to paying back taxes and managing tax obligations before tax season is over.
What is IRS Debt?
Businesses – and their owners – accumulate IRS debt when they cannot meet their tax obligations. In some cases, businesses will neglect to file their taxes annually. In other cases, the business is simply unable to pay the tax debt.
When a business or sole proprietor does not pay its taxes, the IRS will attempt to collect that “debt.” There are other implications for the business as well, like:
- Tax liens: The IRS will attempt to work with businesses but if their tax obligations are not met, the IRS may place a federal tax lien on the company. If the business is a sole proprietorship, this could lead to a tax lien on the owner.
- Credit challenges: Businesses with tax liens might have a hard time qualifying for loans, leases, or other types of business credit. Even if a business does qualify, they might have higher costs because of the unpaid IRS debt.
- Business suspension: The IRS can close a business and seize its assets to pay off any tax debt. While this is generally a last resort, it is a possibility for companies that neglect to pay their payroll taxes or accumulate multiple tax liens.
Unpaid tax debt can cause significant damage to a business. It has lasting repercussions and can have far-reaching consequences for sole proprietors. The tax debt can also accumulate interest and fees, making it even more expensive for small businesses.
Options for Businesses and Sole Proprietorships
Whether due to unforeseen expenses or slow profits, the tax debt can be overwhelming for many companies. Fortunately, the IRS has options depending on a business’ situation.
While the IRS does not explicitly forgive tax debt as the student loan program does with public service forgiveness, businesses that find themselves unable to satisfy their annual obligation have options.
The most common IRS tax forgiveness options for businesses and sole proprietors are as follows:
Offer in Compromise
Businesses and sole proprietors that are within specific thresholds can apply for an “offer in compromise”. This is an option for companies that cannot pay their entire tax debt and need to have some of the debt forgiven.
The IRS reviews each case individually and decides using information about a company’s financial portfolio, including:
- Ability to repay the debt
- Value of assets
- Income or revenue streams
- Expenses and other obligations
Once the IRS approves an offer in compromise, businesses can either pay the entire negotiated amount in full or make payments on the remaining tax debt. If the business can get their tax debt under a certain amount, they might also qualify to have the tax lien removed early. This requires participation in the Direct Debit installment plan.
IRS Fresh Start Program
Not every business or sole proprietor will qualify for – or want to use – an offer in compromise. The IRS Fresh Start program is an alternative for taxpayers and small businesses that meet certain requirements.
The Fresh Start program expands on eligibility and options for businesses and sole proprietors. The most critical new features of the program are:
- Increasing the tax lien threshold to $10,000
- Simplifying the process to remove tax liens for sole proprietors
- Removing tax liens once payments are made on an eligible installment plan
- Allowing small businesses to make payments on tax debts up to $25,000
- Doubling the offer in compromise limits from $25,000 to $50,000
The Fresh Start program is exclusively for businesses and sole proprietors that have unpaid income taxes. It is not an option for real estate, employment, or payroll taxes. The maximum amount of debt a sole proprietor can have and still apply for an installment plan is $50,000. This will give the business up to 72 months to pay back the debt. Small businesses might only have two years to pay back their installment plans.
The IRS offers several payment plan options for small businesses and sole proprietors. It is critical to communicate with the IRS quickly to avoid collection activities and reduce the chances of having a tax lien placed on the business.
Depending on the amount of tax debt a business owes, there are generally two options for payments plans with the IRS:
- Short-term payments plan: Businesses that can pay their tax debt within 120 days can apply for a short-term installment plan. While the debt will still accumulate interest and penalties, there are no other fees for using this option.
- Long-term payment plan: Businesses and sole proprietors that need more time to satisfy their tax obligations can apply for a long-term installment plan. Besides interest and penalties, there are fees for applying and setting up the plan.
In some cases, businesses and sole proprietors can apply for an installment plan online. Otherwise, applications are accepted over the phone, in person, and by mail. It is important to note that interest, penalties, and late fees will still accumulate during this time. This means missing payments can increase the total amount a business pays for their tax obligation. Additionally, businesses and sole proprietors that meet certain income limits may qualify for fee waivers.
First-Time Penalty Forgiveness
Businesses and sole proprietors that fail to pay their taxes on time will be assessed a penalty in addition to owing interest and late fees on the balance. However, the IRS offers a penalty waiver for businesses and individuals that are behind for the first time.
The first-time penalty abatement does come with certain restrictions. To qualify for the waiver, businesses and sole proprietors will need to meet these qualifications:
- The business or sole proprietor cannot have any other tax liens for the previous three years, OR they need to have not filed taxes previously.
- Prior tax returns were filed on time or qualified for an extension.
- All tax debt is either paid or the business has a payment arrangement for the debt.
The penalty for neglecting tax obligations will accrue every year that tax debt remains unpaid. This will increase the amount of interest on an unpaid tax debt as well. Since the debt must be satisfied to qualify for the penalty forgiveness, businesses should settle the tax payment before applying for the first-time penalty abatement.
Statute of Limitations
If a business cannot make payments for a long time, the IRS might forgive the debt once the statute of limitations is reached. However, there will likely be a tax lien until the debt is forgiven or paid unless other arrangements are made.
Tax Settlement Agencies
A third-party company might be able to work with businesses to have some debt forgiven. This can be practical for businesses with a lot of debt to settle, but it does come with additional costs as well.
Every business situation is unique, so the right choice for small businesses and sole proprietors will vary depending on how much back tax is owed and how much revenue and assets the business has.
Does the IRS Forgive?
The short answer is “not exactly.” The IRS does offer a reprieve for businesses and sole proprietors that cannot afford their tax obligations. This is accomplished using an offer in compromise. Businesses apply for this with the IRS and can choose to pay all at once or over time.
Alternatively, the IRS will “forgive” debt once the statute of limitations expires. This will follow the business and owners until the payment is satisfied though, so it is the least productive choice for businesses that want to continue operations.
What is the Statute of Limitations on Tax Debt?
The IRS has the authorization to attempt to collect a debt for up to 10 years. That means that businesses and sole proprietors that neglect to pay their taxes are subject to collection activities for a decade. Those collection activities can even include wage garnishments for sole proprietors or tax liens for both individuals and businesses.
If a business or sole proprietor fails to pay their taxes for several years in a row, this statute of limitations applies until the last tax debt is paid or reaches the limitations.
Will the IRS Negotiate?
Yes – in most cases the IRS will negotiate with businesses and sole proprietors to settle any outstanding tax debt. The options for this will vary depending on the situation, but there are typically two ways to negotiate tax debt:
- Apply for an offer in compromise to pay less than what the business owes.
- Apply for a short-term or long-term payment plan to satisfy the debt within two years.
The general rule of the IRS is that they will approve an offer in compromise – that is, an offer to pay less than the full amount – if it is for an amount that they could collect in a reasonable amount of time. They do not approve every application though, so a backup plan may be necessary.
The Fresh Start Program
The IRS operates the Fresh Start program, which aims to reduce the tax burden for businesses and sole proprietors that cannot financially afford their tax debt. This initiative increases the threshold for federal tax liens and allows for payment plans on greater dollar amounts.
The Fresh Start program even expanded the number of businesses and sole proprietors eligible to apply for an offer in compromise. Additionally, the IRS offers payment plan options for taxpayers that want to satisfy their debt but need more time. This can help businesses avoid tax liens in some cases.
During the COVID-19 pandemic, the IRS expanded the availability and timeline of IRS tax forgiveness options. This gives businesses more time to file and pay taxes, as well as offers a reprieve for businesses and sole proprietors that need to apply for an offer in compromise.
How Do Federal Tax Liens Impact Businesses?
When a business or individual fails to pay their taxes, the IRS can place a federal tax lien on the entity or person. This is a public notice that lets potential creditors know that the IRS has a claim to that business or sole proprietor’s assets, including property.
Tax liens can prevent businesses from qualifying for new credit and limit access to funding from investors or venture capitalists. Fortunately, there are a few ways the businesses can have a tax lien removed. These include the following:
Discharge of Property
This is an option for businesses or sole proprietors that have a tax lien on a property they wish to sell or refinance. It only removes the lien on the specific piece of property while any other tax liens will remain on the public record.
Businesses and sole proprietors that need access to other credit might use subordination to prioritize the new creditor over the IRS. This does not remove the lien but does expand access to business credit.
If a business or sole proprietor is making payments on an eligible installment plan, they might qualify to have the tax lien removed before the debt is fully paid. This is the best option for businesses that can make payments on their taxes.
A federal tax lien is removed within 30 days once a business or individual pays its taxes in full. Alternatively, the IRS can levy property, which is why communication is critical if businesses are unable to pay their taxes.
Avoiding Federal Tax Liens and Satisfying Tax Debt
Most businesses want to satisfy their tax debt, but circumstances can come up that prevent a company from taking care of that obligation. The best way to avoid a federal tax lien is to open a line of clear communication with the IRS. This means establishing that the business is behind and actively working with the IRS to negotiate or settle any debt.
Once a business is behind on taxes, the fees start accumulating, and it becomes harder to qualify for any penalty waivers. That means businesses and sole proprietors need to be diligent about contacting the IRS and making payments on any installment options. A tax advisor might be able to offer insight into these situations as well.