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Back to Tax 101
As a business owner, you know how essential steady cash flow is to your company. It’s what keeps your business running and allows you to make necessary purchases, pay your employees, and operate. With that said, running a business can be fairly costly. If your cash flow begins to suffer, it can be challenging to pay necessary expenses, such as your employee’s wages, rent, and taxes.
Today, we’ll focus on that last expense: taxes. One expense business owners can’t afford to neglect is Uncle Sam’s money. Small businesses not paying taxes can face some serious repercussions, such as fines, penalties, and even jail time.
If you’re a business owner or thinking about starting a business, it’s important to know all of your legal obligations being the owner of a company. In this post, we’ll go over what happens if a business does not file taxes, along with ways you can pay your business taxes to stay on the IRS’s good side. Read through to find all you need to know about paying business taxes or use the list below to navigate to a section of your choice.
- Tax Fraud Penalty
- Underpayment of Estimated Taxes Penalty
- Failure to File Penalty
- Failure to Pay Penalty
- Accuracy-Related Penalty
- Trust Fund Recovery Penalty
- Fines and Jail Time
What is Tax Evasion?
Tax evasion is a serious crime. Taxes are used for a variety of national programs, such as Social Security, Medicare, Medicaid, our defense organizations, and security. Without tax dollars, millions of Americans won’t have access to programs that keep us safe and healthy. Avoiding paying taxes means programs like these might not have the necessary funds to assist Americans across the country, which is why tax evasion is taken seriously by the federal government.
So, what is tax evasion? According to the IRS, there are two types of tax evasion:
- The willful attempt to evade or defeat the assessment of a tax, and
- The willful attempt to evade or defeat the payment of a tax
Evasion of assessment is when you attempt to evade or defeat a tax by filing a false claim that omits income and/or claim deductions that you are not entitled to. This incorrect assessment of the tax creates a deficiency that constitutes an attempt to evade or defeat tax.
Evasion of payment typically occurs after the existence of a tax due and owing has been established. If the tax owing has been established and you deliberately conceal money or assets from which the tax could be paid, it’s considered an evasion of payment.
We’ve all heard the stories of infamous tax evaders, such as Al Capone, Leona Helmsley, and Nicolas Cage billing personal expenses, using offshore accountants, and failing to file their taxes. These tax dodgers deliberately avoided paying taxes, which left them with hefty fines to pay and even jail time.
While no one likes paying taxes, they’re essential for law enforcement, social programs, and education, among other things. However, if you’re a business owner looking to lower your tax liability, there are ways to legally pay less money in taxes, which is called tax avoidance. Take a look at the differences between tax evasion and tax avoidance in the next section.
Tax Evasion vs. Tax Avoidance
Tax evasion and tax avoidance are two different concepts that may be thrown around interchangeably. However, one is legal, and one is illegal.
Tax evasion is illegal and is the act of deliberately avoiding taxes by not reporting income and expenses and failing to pay taxes.
Tax avoidance is a legal way to minimize taxes by taking advantage of methods in the tax code, such as credits and deductions that can protect income from taxes.
The main difference between tax evasion and tax avoidance is legality. Tax evasion is illegal; it’s when you intend to evade taxes, which can put a felony on your record, place you in jail, and give you a hefty fine to pay. For example, hiding assets or not disclosing financial income or information with the intent to avoid tax liability can be deemed as tax evasion.
If the IRS suspects you’re evading taxes, they will conduct an audit to see whether or not you’re abiding by the law. From the most recent data released by the IRS, roughly 1 million tax returns were audited. Of those returns that were audited, 74.8 percent were done through correspondence, while 25.2 percent were conducted in the field.
Tax avoidance, on the other hand, is completely legal as long as rules are followed. For example, putting your money in a tax-advantaged retirement account such as an employee-sponsored 401(k) or IRA can lower your tax bill by delaying taxes until a later date. There are also plenty of tax credits and deductions you may qualify for that can reduce your business’s tax bill, such as vehicle expense and salary deductions, and credits like the Work Opportunity Credit and Renewable Electricity Credit.
Common Tax Penalties for Businesses
Tax evasion can lead to some expensive penalties that can close your business for good. It’s always best to be honest with the IRS when reporting your taxes, and to file your taxes on time and in full every time. Making a mistake on your tax return often won’t lead you into trouble. However, if you knowingly misreport information or fail to pay with intent, you can be found guilty of tax evasion or tax fraud. If found guilty, you can face penalties, fines, and imprisonment.
In addition to penalties, you’ll also have to pay interest until each penalty is paid off. Underpayments come with a 5 percent interest rate, and for underpayments by large corporations face a 7 percent interest rate.
Take a look at common tax penalties and imprisonment time for tax crimes below:
1. Tax Fraud Penalty
The tax fraud penalty is one of the IRS’s most severe penalties. If the IRS finds you guilty of tax fraud, the tax code, under Section §6663, permits the government to charge a penalty of 75 percent on the portion of the underpayment tax amount that’s attributed to fraud. The IRS needs to find you guilty of intentionally committing tax fraud. Evidence that can prove you guilty of tax fraud include:
- Destroyed or altered evidence, such as receipts, books, logs, and other records
- Keeping two different books
- Only using cash to hide your income
- Using a false Social Security Number
- Hiding income in offshore accounts, trusts, or shell accounts
- Lying to IRS agents during an audit
- Hiding or omitting assets or income on your tax return
- Deliberately avoiding record keeping
- Claiming the wrong deductions or credits
2. Underpayment of Estimated Taxes Penalty
As you can guess, the IRS requires you to pay your tax bill in full every year. If you fail to pay at least 90 percent of your tax bill, you can expect the IRS to charge an underpayment of estimated taxes penalty. However, you can avoid this penalty if you owe less than $1,000 in tax after subtracting your withholdings and credits, if you paid at least 90 percent of your taxes for the current year, or paid for 100 percent of your taxes shown on your return the prior year.
3. Failure to File Penalty
What happens if a business doesn’t file taxes? They can get charged a failure to file penalty. The failure to file penalty charges 5 percent of the tax you owe for each month, or for part of the month where your return is late. The failure to file penalty can reach up to 25 percent, and if your return is more than 60 days late, you can face a minimum penalty of $435 or the tax you owe, whichever is less.
It’s important to remember that even if you don’t have the money to pay your taxes, you should always file on time to avoid this penalty. You can also avoid this penalty by filing for an extension to file your return, which will give you six months to file your tax return
4. Failure to Pay Penalty
Not only can you get charged a penalty for not filing, but you can also face a penalty if you don’t pay taxes. What happens if a company doesn’t pay taxes? They can expect a failure to pay penalty. The failure to pay penalty is one-half of one percent for each month you’re late on paying, or for part of the month, and can reach up to 25 percent of the amount of tax that is unpaid until your tax is paid in full. If you have a failure to file penalty and a failure to pay penalty for the same month, the maximum penalty you’ll pay for both is 5 percent.
Unfortunately, even if you apply for an extension to file your taxes, you still need to pay your taxes by the tax deadline, which typically falls on April 15th. If you don’t think you’ll be able to pay your taxes on time, you can set up an IRS payment plan, such as an installment agreement, which can reduce the penalty down to 0.25 percent each month while the installment agreement is in effect.
5. Accuracy-Related Penalty
Substantial understatements of the taxes you owe or errors on your tax return due to negligence can lead to an accuracy-related penalty. An accuracy-related penalty charges a 20 percent penalty and is issued after an audit investigation was conducted where you were found guilty of failing to report income or prove small business tax deductions you took. As with most penalties, interest is imposed on the accuracy-related penalty from the due date until the penalty is paid in full.
6. Trust Fund Recovery Penalty
As a business owner, you have employees who earn salaries and wages. When you pay them, you have to withhold part of their income to pay for a variety of small business taxes, such as social security taxes, railroad retirement taxes, federal unemployment taxes, Social Security and Medicare taxes (FICA), and/or collected excise taxes. The money from these payroll taxes are held in a trust until you make a federal tax deposit in the amount that is due.
If you can’t pay these taxes, you may face the Trust Fund Recovery Penalty (TFRP). The TFRP applies to you if your unpaid trust fund taxes can’t be immediately collected from your company. If you willfully fail to pay these taxes, the penalty you face is based on the unpaid income taxes withheld, plus the employee’s portion of the withheld FICA taxes. For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.
7. Fines and Jail Time
The IRS’s Tax Crimes Handbook outlines the details, fines, and jail time for various tax crimes, such as tax evasion and tax fraud.
- Attempt to Evade or Defeat Tax: If you’re found guilty of attempting to evade or defeat paying taxes, Section §7201 of the Internal Revenue Code (IRC), can fine you no more than $250,000 for individuals and $500,000 for corporations, or imprisonment of no more than five years, or both, along with the costs of prosecution.
- Fraud and False Statements: Tax fraud is another scenario where you may find yourself in legal trouble with the IRS. Tax fraud is different from tax evasion in that it’s when a taxpayer provides incorrect information on a tax return. Tax evasion is the act of using concealment, deceit, or other affirmative acts to avoid paying taxes.
Tax fraud comes with its own fines and jail time. If you’re found guilty of tax fraud, you can face a $250,000 fine for individuals or $500,000 for corporations, and/or three years of imprisonments, along with the costs of prosecution, which is highlighted under Section §7206 of the IRC.
- Willful Failure to Collect or Pay Over Tax: As a business owner, you’re also legally obligated to collect and pay over tax to the IRS by collecting excise taxes from your employees’ paychecks. If you fail to collect or truthfully account for and pay over tax, you can face a $250,000 fine for individuals or a $500,000 for corporations, and/or imprisonment no more than five years, along with the costs of prosecution (Section §7202, IRC).
- Fraudulent Returns, Statements, or Other Documents: Section §7207 of the IRC is for cases where you provide fraudulent or false business records, lists, returns, accounts, statements, or other documents to an IRS employee with knowledge that the document is false or fraudulent. If found guilty, you can face a $100,000 fine if you’re an individual or corporation, and/or up to one year of imprisonment.
Other Ways to Pay Your Business Taxes
As you can see, a small business not paying taxes can land in serious trouble. If you’re a small business owner, staying on top of your taxes and paying them on time and accurately is essential. However, we know how hard it can be navigating every aspect of your business, from filling out all the tax forms for small businesses to keeping your customers happy, which can make it easy to fall behind.
- Installment Agreements: These are agreements you make with the IRS that allow you to pay off the IRS over a set period of time in the form of monthly payments. There are a variety of installment agreements you can choose from depending on your situation, such as Stair Step Agreements, Streamlined Installment Agreements, Partial Pay Installment Agreements, Conditional Expense Installment Agreements, and Traditional Installment Agreements.
- Offers in Compromise: If your tax debt will put you in financial hardship, you can negotiate an Offers in Compromise. With this, the IRS will determine the maximum amount they can take without putting you in financial hardship, while the rest of the money will be forgiven.
- Currently Not Collectible Status: If you’re unable to meet your basic needs, let alone pay your tax liability, you can apply for Currently Not Collectible Status. This status will remove your tax obligations from active collections and be relieved from your IRS tax debt. Tax debts have a statute of limitations for ten years, so you must apply each year to show the IRS you’re not financially able to pay your tax debts without causing financial hardship. This status is meant to help you improve your finances, and once improved, a new repayment plan will be created.
- Penalty Abatement: As you know, small businesses not paying taxes can wrack up some hefty penalties. While the interest on penalties can’t be forgiven, you can have your penalties abated if you can prove you didn’t meet your tax obligations due to uncontrollable circumstances.
Sometimes, a penalty may have been imposed by accident. After all, the IRS isn’t perfect and can make mistakes, too. If you think the IRS made a mistake, find proof, such as receipts and previous returns, to show them the penalty was an accident. If this is your first time getting a penalty, you can also apply for an administrative waiver, such as the first-time penalty abatement waiver, which forgives first-time offenders. Reasonable cause is another way to get a penalty excused, such as a medical hardship or natural disaster.
Paying your taxes accurately, on time, and in full is the best way to avoid problems with the IRS. Even if your business’s cash flow isn’t in the best shape, evading taxes or falsely reporting taxes can cause more problems than it’s worth. At the end of the day, the IRS is willing to work with you to better your tax situation, so opting for one of these repayment plans can help you meet your tax obligations without causing financial difficulties.
What Happens If a Business Does Not File Taxes?
A small business not paying taxes can face penalties, fees, and even jail time. If you’re a small business owner and worried you can’t file your taxes or pay them in full, don’t worry.
At Community Tax, our team of professional tax experts are here to help. Our team offers a wide range of services, such as tax preparation services to ensure your tax forms are completed accurately, accounting services to streamline your business accounting and grow your profits, and tax resolution services to create tax payment plans to get you back on track with the IRS.
When it comes to operating your business, you don’t have to go at it alone. Community Tax is with you every step of the way to help your business run smoothly and comply with the IRS.
