The last bill anyone should ever ignore is a tax bill. Yet, that seems to be exactly what many landscaping businesses – and their owners – are doing. What will happen and what you should do if you cannot pay your taxes on time?
It is well documented that the Internal Revenue Service wants “its” money immediately and has many tools at its disposal for collecting any and all tax debts. Less well-known are the legitimate options available to help avoid the trouble, interest and penalties that accompany unpaid tax bills.
There are procedures for requesting payment extensions as well as installment payment arrangements which will keep the IRS from instituting its’ collection process (liens, property seizures, etc.) against a landscaping business – or its owners.
Penalyzing penalties. The IRS is only too happy calculate the penalties and interest for all unpaid tax bills since few taxpayers are aware that there are, in general, three separate penalties:
– Failure to File Penalty
– Failure to Pay Penalty
The “failure to file” penalty accrues at the rate of 5 percent per month or part of a month (to a maximum of 25 percent, reached after five months) on the amount of tax the return should show as owed. The “failure to pay” penalty is gentler, accruing at the rate of only 0.5 percent per month or part of a month (to a maximum of 25 percent reached after fifty months) on the amount actually shown as due on the return.
If both apply, the failure to file penalty drops to 4.5 percent per month, so the total combined penalty remains at 5 percent. Thus, the maximum combined penalty for the first five months is 25 percent. Thereafter, the failure to pay penalty can continue at 0.5 percent per month for 45 more months, yielding an additional 22.5 percent. In total, these combined penalties can reach 47.5 percent of the unpaid liability in less than five years.
Both of these penalties are in addition to interest charged for all late payments. If estimated tax payments were also missed, an additional penalty is tacked on for missed estimated tax payments. This penalty is computed at 3 percent above the fluctuating federal short-term interest rate for the period.
When it comes to paying the tax bill, and hopefully avoiding penalties and interest, the options include borrowing or paying by credit card.
Borrowing to pay taxes. Given the rate at which the above-mentioned penalties and interest grow, many landscape contractors and business owners borrow money to pay their taxes. In many situations, the rate of interest paid to a family member, or even to a bank, is less overall than that which would have to be paid to the IRS.
Loans from relatives or friends are often the simplest method to pay the bill. When loans from relatives, friends or the operation’s owners/shareholders are not available, a loan from a bank or other commercial lender might be the answer although such loans are unlikely to be made on favorable terms to any hard-pressed taxpayer. Moreover, unless business related, interest on a loan to pay taxes is usually nondeductible personal interest.
Charge it. There are a number of advantages to paying taxes by credit card, including the fact that it is convenient. A landscaping business or its owners can file early and make a payment by credit or debit card later, thus delaying out-of-pocket expenses.
Credit card loans are however, likely to carry high rates of interest, interest that is not, in many cases, tax deductible. While the IRS does not receive or charge any fees for card payments, so-called “convenience” fees are charged by the service providers. While the IRS cannot pay or reimburse any convenience fee to taxpayers, service providers “convenience fees” are a deductible business and individual expense.
Keep in mind that federal tax deposits cannot be made through these options. Furthermore, amounts not properly deposited may be subject to a 10 percent penalty for failure to deposit through an authorized financial institution or the IRS’s Electronic Federal Tax Payment system (EFTPS.
Procrastinate. The IRS is quite clear: it wants all taxes paid when due or sooner, even demanding immediate payment when granting extensions of time in which to file the tax return. Under some circumstances, however, a short-term (120 day) extension may be arranged. A short-term extension gives a contractor or business up to 120 days to pay. No fee is charged, but the late-payment penalty plus interest will apply.
An extension of time to pay is also available to those who can show that payment would cause “undue hardship.” Qualifying for an undue hardship extension means an extra six months in which to pay the tax shown as due on the tax return. The failure to pay penalty will be avoided although interest will still be charged.
Should the IRS determine a “deficiency,” i.e., taxes owed are in excess of the amount shown on the return, the undue hardship extension can be as long as 18 months and, in exceptional cases, another 12 months can be tacked on. However, no extension will be granted if the deficiency was the result of negligence, intentional disregard of the tax rules, or fraud.
Naturally it is not enough to show that it would just be inconvenient to pay your tax when due, payment must be shown to be a real hardship.
Time trap. The IRS will often accept installment payments for some tax debts. Generally, the IRS allows taxpayers to make installment payments on the taxes owed -– if $25,000 or less. In fact, the IRS is required to enter into a “guaranteed installment agreement,” where the tax liability is $10,000 or less (not counting interest and penalties.
If more than $25,000 is due, payment plan options also exist although the IRS must first determine eligibility.
Unfortunately, while partial-pay installment agreements are relatively easy to obtain, the IRS can re-evaluate the terms every two years. If, for example, the IRS thinks a taxpayer can afford bigger payments, then the partial-pay installment agreement might have to be re-negotiated. The taxpayer can also request re-evaluation at any time should circumstances change to such a degree that the agreed upon payment can no longer be made.
Making the IRS an offer. Yes, negotiating is an acceptable practice when it comes to tax bills. An offer-in-compromise is an IRS program that many contractors and business owners have used to settle their tax debts for a fraction of face value. It cannot, however, be requested beforehand.
Naturally, the taxpayer must be in compliance and must have the ability to pay and to borrow. For example, the taxpayer must be current on estimated tax payments or federal income tax withholding, must be making payroll tax deposits on time, and must have filed all tax returns when making an offer-in-compromise.
Like any creditor, the IRS prefers a partial payment to no payment at all. Thus, the IRS might be willing to settle a tax bill for less than the full amount if: (a) the owner or the landscaping business are unable to pay the full amount, (b) there is doubt as to how much the tax liability is, (c) collection of the liability would create economic hardship, or (d) due to exceptional circumstances such as a medical condition that prevents proper management of financial affairs, or reliance on erroneous advice from the IRS, the IRS's collection of the full liability would be detrimental to the fair and equitable administration of tax laws.
Reasonable cause. If the owner or the business can demonstrate that a reasonable cause exists to abate or remove tax penalties, they may be surprised to find those penalties forgiven by the IRS. The IRS determines if reasonable cause exists by considering all the facts and circumstances.
Ignorance of the law is generally not an excuse to avoid meeting one’s tax obligations. However, whem combined with other factors such as the taxpayer's level of education, whether the taxpayer was subject to this tax before, if the taxpayer was previously penalized by the IRS, if there were recent changes in the law or forms that the taxpayer could not reasonably have known, or if the complexity of the issue involved was substantial, penalties may be abated.
Serious consequence avoidance. No contractor or business owner should allow an inability to pay their tax liability in full keep them from filing all tax returns properly and on time. It is also important to remember that an extension of time to file tax returns does not extend the time to pay the tax bill.
Generally, businesses and/or their owners have several alternatives for resolving unpaid taxes: installment agreements, partial-pay installment agreements, or an offer-in-compromise. Two other options, filing for bankruptcy or being declared “not currently collectible” by the IRS are far less desirable strategies.
The complexity of the tax rules and the many options available to every landscaping business and business owner unable to pay their tax bills obviously require professional guidance.