How to File Back Taxes for Small Business Owners
A mounting pile of unpaid back taxes can be overwhelming for small business owners. However, getting back on track is both necessary and doable with the right documentation and support.
Failing to take action to redress discrepancies you have with the IRS can lead to serious consequences for you and your business. Many small business owners turn to professionals to get their affairs in order and avoid costly mistakes and penalties going forward.
What Are Back Taxes?
“Back taxes” refer to an outstanding state or federal tax liability from a prior year. Keep in mind that federal tax returns for income taxes are due on April 15 every year for the previous year.
If you receive a letter from the IRS notifying you that your taxes are overdue or requesting more information regarding your return, get help from an expert in tax resolution services. Failure to do so can lead to more serious consequences down the line.
Why Should You File Back Taxes?
There are many reasons why businesses should file back taxes:
1. Claim a Tax Refund
Filing a back tax return can result in receiving a tax refund if the IRS owes you one. If you've withheld too much federal income tax from your salary or were eligible for one or more tax credits, filing a tax return could be financially advantageous.
Important note: You must file your tax return within three years of the return due date to claim any tax refunds.
2. Minimize Penalties
Filing your tax return on time means you avoid or minimize penalties. However, if you don't meet the deadline for filing your return, you will be subject to an additional 0.5% of your unpaid tax amount for each month your return is late. The fees will accrue until the penalty reaches 25% of your outstanding tax amount or you pay the balance in full. You may also be subject to minimum penalty limits and interest on overdue taxes.
3. Tax Returns for Loan Applications
Mortgage and business loan providers may require you to submit documentation that proves your business income as part of the approval process. This process will be smoother if you file your taxes before applying for a loan as lenders will typically only count income declared on tax returns that have been processed and approved by the IRS.
4. Pay Your Social Security Taxes to Be Eligible for Benefits
If you're self-employed, you must pay Social Security and Medicare taxes through your individual income tax return. Filing a return and paying the relevant taxes on your self-employment income ensures that you will be able to receive Social Security, retirement, disability, and Medicare benefits if or when you need them.
How Many Years of Back Taxes Can You Pay?
The IRS recommends filing all the years of back taxes you owe, even if you can't pay it all back.
Remember that you must technically file your return each year by the tax filing deadline. If you don't, the IRS can get involved for any tax years that went unfiled. The IRS generally has 10 years to collect taxes, penalties, and interest. That said, IRS Policy Statement 5-133 states that managerial approval will be needed to go back more than six years to enforce any procedures related to unfiled taxes.
How to File Back Taxes
Take the following steps to get back on track if you've gotten behind on filing your tax returns and need to file for prior tax years:
1. Gather the Relevant Documents
The first step is gathering tax documents for the tax year you're filing for. For example, if you're filing your 2022 tax return, you'll need your W-2 or 1099 and any other relevant documents from 2022 (such as receipts for business expenses you intend to claim as deductions).
2. Request a Transcript If You Lack Documents
If you don't have access to one or more of these documents, you can request an IRS tax transcript for any given year. This transcript will give you the information you need to get your tax return done.
3. Make Sure You Use the Correct Forms
Tax rules, forms, and rates change every year. Make sure you use the correct tax forms for the year you're filing. You can find backdated forms with instructions on the IRS website.
4. Look into Payment Plan Options
If you're behind on your taxes because you're going through financial hardship, several tax relief options may be available to you:
You can temporarily delay collection activities (although penalties and interest will continue to accrue).
You can request an installment agreement.
Some filers may be eligible for an offer in compromise.
5. Get Help When You Need It
Navigating the tax system is a tricky business and many small business owners hand the reins to a tax professional. Tax rules differ from state to state. For example, a business that is filing back taxes in Jacksonville, Florida, would typically only need to worry about federal taxes as no personal income tax is charged by the state. Your tax professional can also help you discover if you are eligible for deductions or credits during the tax year for which you are filing. He or she can then help you put everything in order so that you avoid similar problems going forward.
An alternative (or complement) to hiring a tax professional is to use tax preparation software that helps you file prior-year tax forms. You may also need help integrating new tax software into your existing system. QuickBooks ProAdvisors can help you set up QuickBooks correctly so that you will be on track with your business taxes for the current tax year.
What Happens If You Don't File Back Taxes?
The consequences of not filing back taxes can be grave and can even lead to criminal prosecution if the IRS clocks on to the fact that your business owes unpaid taxes. It's easy to see unfiled back taxes as water under the bridge, especially if several years have gone by. However, not filing past due tax returns is risky—and illegal—for several reasons:
You May Have to Pay Various Penalties
You could be charged a failure-to-file penalty if you owe money.
You may be charged interest on any tax debt and/or penalties due.
You May Lose Your Access to Tax or Other Financial Benefits
You won't receive tax refunds even if you're owed money.
You won't receive any tax credits, exemptions, or deductions.
You may lose your right to claim a capital loss against a capital gain.
You may have difficulty taking out a loan or filing for bankruptcy.
The IRS can file a substitute return for every year you have unfiled taxes.
You May Face Other Legal Consequences
You can become subject to collection or enforcement actions.
You may be subject to criminal prosecution.
Get Back on Course With Help from a Tax Professional
Running a small business is a lot of work and business owners who handle their own taxes can easily miss deadlines for filing and payment. This can be a costly mistake for you and your business, and one that can be avoided by getting help from a professional.
If you've already missed a deadline or feel overwhelmed by meeting the many obligations involved in managing your business's finances, get help. A tax professional can get you back on course this tax season so that you can focus on what you do best.
