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How to keep the IRS off your small business’ back

By Ronnie Hicks

Time is up for filing your taxes. The April 15th deadline for filing taxes is passed, but this isn’t the end of tax season for aIncome tax return time large number of taxpayers, particularly small business owners. 

The projected tax gap for 2009 is $343 billion, the largest in U.S history. Pair this with the IRS’s increased collections budget and renewed tenacity for collecting funds from small businesses and you can expect tax season to drag on for months to come.

The kinder, gentler IRS?

The IRS kicked off tax season for 2009 on a positive note by announcing its intentions to ease the burden on taxpayers who owe in these difficult financial times. IRS Commissioner Doug Shulman has stated, “With so many people facing financial difficulties, we want taxpayers to get all the tax credits they’re entitled to as quickly as they can. In addition, we are creating new protections to help people trying to meet their tax obligations. The IRS will do everything it can to help during these tough times.”

Additionally, the IRS national taxpayer advocate Nina Olson stated in her annual report to Congress that it is “imperative” for tax collectors to consider the economic circumstances of a taxpayer before initiating enforcement actions

But is the IRS really changing their policies to help the American taxpayer?

The budget for the U.S. Department of the Treasury for 2009 paints a different picture of the IRS than the IRS’ “kinder, gentler” campaign. The IRS is looking to increase revenue through effective tax collection for 2009. To achieve this, its enforcement budget has increased to $7.5 billion; this is a 7% increase over 2008.

In 2007, the IRS collected a record $59 billion through enforcement activities, a 20% increase over 2006. These numbers show a return on investment for enforcement activities of $8.6 to $1.

The IRS will target small business for 2009 to continue their success from prior years.

Owning your own business to be your own boss is the American Dream. But that dream could become a nightmare now that the IRS takes a takes special interest in small business owners.

Small business owners are estimated to be the largest component of the $343 billion tax gap. Because of this the IRS plans to issue new enforcement initiatives to improve revenue reporting for small business and self-employed individuals. Additionally, the IRS will require the reporting of automated payments to support business income claims.

Larger corporations and businesses are not immune to increased scrutiny; the IRS is looking to collect more revenue from corporations by increasing the number of audits.

Small business’ No. 1 fault

The key reason why businesses end up owing the IRS is failing to make their quarterly payroll taxes. Payroll taxes are the first thing businesses put on the back burner to stay afloat. Paying your quarterly 941 payroll tax forms is an obligation, not an option.  

Too often small business owners take that tax withholding money and put it toward the business, especially if their finances are suffering due to the economy. Many business owners promise they’ll make it up next quarter; but when the next quarter comes around and business still isn’t good, the cycle continues until the tax debt is monumental.

Interest and penalties accrue immediately after the first quarterly payment is missed. Even if the business owner manages to pay the money back by the next quarter, there will be interest and non-filing penalties to pay. This adds up quickly, and if the business owner cannot pay the obligation, the IRS may go after accounts receivable, equipment, and other assets. In extreme cases, the IRS can shut down the business and pocket the proceeds from selling all of the business assets.

Because the IRS is particularly aggressive when it comes to collecting on delinquent payroll taxes, anyone with check-signing power for the business runs the risk of being held responsible for the tax debt.

At-risk professions

Several professions have a high risk of being audited and eventually owing the IRS.  These include:

• Doctors and dentists. Doctors and dentists running their own small business or offices are prone to forgetting or omitting their obligations as taxpayers. The IRS can attack accounts receivables, effectively preventing the doctor from being paid.

• Attorneys and accountants. It’s a surprising fact that attorneys and accountants, who should know the IRS rules and laws inside and out, often owe the IRS. Attorneys and accountants who already know the tax laws inside and out are prone to getting creative with their tax returns, and getting into trouble with the IRS.

• Cash-intensive businesses. Hair salons, auto repair shops, and other businesses that receive tips and cash-only transactions are closely monitored by the IRS. It’s easier to hide income and tips from the IRS when it’s a cash transaction, and the IRS doesn’t want to risk losing that income.

Getting yourself out from under tax debt

Do you already owe the IRS? You can get help to get back into compliance:

• Consider a loan. IRS penalties and interest can have a devastating impact on a small business. The high interest rates cause the tax debt to grow exponentially. To reduce this burden and save money, consider paying the entire debt amount with a loan. The interest rate on the loan will be lower than the IRS’s interest rate, which can save you thousands of dollars in the long run.

• Installment agreement. Installment agreements are binding contracts with the IRS. Once you are set up in an installment agreement, you need to pay your full debt in monthly payments for a set number of months. Interest and penalties continue to accrue on your debt while you pay the monthly installments, but keeping current with the payments will prevent the IRS from seizing assets or accounts receivables.

• Hire a professional. Working with a tax resolution professional with experience in handling small business issues is a wise idea if you feel overwhelmed by the IRS collections process.

Start now to prepare for next tax season

Now is the time to start on 2009 taxes.

1. Hire an accountant. Working with a CPA or a reliable tax professional is well worth the investment if it will save you from trouble with the IRS. Utilizing the services of a professional tax preparer and/or an accountant will help keep you from owing the IRS in the future.

2. Pay the IRS first. Many business owners owe a number of creditors, but paying the IRS should be your No. 1 priority. No other creditor can do the amount of damage the IRS can do. The IRS can seize accounts receivables, assets, business equipment, and even take the keys to your business. Other creditors don’t yield the same amount of power

3. Stay in compliance. When you are a new business, it is really tempting to use the payroll tax withholdings to make improvements to your business rather than borrowing money from a bank or creditor. But this could have devastating effects, and could even lead to the shutdown of the business. No matter what, it’s important to keep on top of the game and pay your taxes on time every quarter.

hicksRonnie Hicks, Esq. is a tax attorney with Jacksonville-based Tax Defense Network, Inc. (www.taxdefensenetwork.com). He can be reached at info@taxdefensenetwork.com or at 888-248-9058. Tax Defense Network a tax resolution firm, with more than $145 million in tax debt under management.


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