When business is going really well, there may not be any time to sit down and focus on taxes. Having a bookkeeper do data entry is often not enough. After a couple years go by, it might even amount to a months-long project to get caught up.
But this isn’t the worst of it, the penalties and interest can cause a debt to balloon. The IRS is also a creditor with special tools, such as passport denial and account levies. In this post, we share a story out of Texas.
A decade of missed taxes
The Wall Street Journal covered the details, a Texas farmer and farm-equipment dealer did not file his tax returns for 12 years. The government claims he owes $26 million in back taxes. While not paying taxes was his biggest mistake, his second was not filing tax returns. Almost two-thirds of his bill is penalties and interest.
He fought the assessment, but lost in both the tax court and in the U.S. appeals court.
In a recent post, we discussed the late-filing penalty. This is the larger of the two penalties for filing late (5 percent per month) and paying late (.5 percent per month). Whether alone or combined these penalties top out at 25 percent of the amount owed per month or portion of a month that you are late.
The interest rate on tax debt is also quite high compared to other types of debt at 6 percent in 2019.
Steps to limit the pile-on effect
The potential difference is $26 million versus $8.5 million in the Texas man’s situation. Both numbers are significant, but even the lower figure likely overstates his tax obligation. When he failed to file tax returns, the Service only received income numbers. It did not have a way to account for his expenses and other deductions.
So, a few ways to avoid/limit penalties:
- Request an extension to avoid the late-filing penalty
- File an incomplete return by the April 15 and amend it later
- Pay as much as possible (credit cards may even carry lower interest)
- Request an online payment plan to stretch repayment over as many as six years (approval is nearly automatic if tax debt is less than $50,000 and cuts late-payment penalty in half).
Tax season is a time to seek assistance solving structural tax problems from the past and to avoid them in the future. Bring in a tax attorney on the front end before the Service starts collection efforts.