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As the April 15, 2024 tax filing deadline has passed, many entrepreneurs and small business owners are struggling with outstanding taxes. Recent challenges have compounded these issues, making now a critical moment for business leaders to act. Further delay could exacerbate financial strains and legal consequences.
The latest IRS data highlights the urgent need for businesses to deal with their tax obligations. The IRS, using funds from the Inflation Control Act, has significantly increased its enforcement efforts. Only in 2023, the IRS launched the so-called latest compliance initiative focusing on high-income non-reporters, identifying over 125,000 cases since 2017 under huge effort restoring justice to the tax system. Moreover, the IRS has intensified its audit activities, especially in the case of rich individuals and large partnerships.
Drawing on our team at Advanced Tax Solutions’ extensive experience in resolving tax problems, we present 4 basic strategies for entrepreneurs to effectively resolve outstanding taxes and prepare for productive communications with the IRS.
1. Understand the urgency and consequences
Ignoring the issue of back taxes can result in serious consequences. The IRS may impose high penaltiesincluding a monthly penalty of 5% for late filing for the first five months, which quickly adds as much as 25%. An additional penalty of 0.5% monthly is then assessed, plus interest on back taxes, penalties and accrued interest. In extreme cases, the IRS may file a substitute return on your behalf, which regularly omits deductions and results in the highest possible tax liability.
The IRS’s increased enforcement budget underscores the urgency of this issue. Using your latest IRA financing, White House over the next decade, he planned to just about quadruple the IRS’s annual enforcement budget, to $19.5 billion, and the agency announced quite a few multi-year efforts in several key areas to extend collections.
2. Collect and organize financial documentation
Before contacting the IRS, make sure all of your financial records, including income statements, expense reports and previous tax returns, are rigorously organized. Comprehensive and organized documentation will facilitate communication with the IRS and show your commitment to solving the problem.
Use digital tools and accounting software equivalent to Sage, Oracle and Xero to maintain track of your financial records throughout the yr. These tools can help you generate detailed reports that might be easily shared with your tax preparer or the IRS. The accounting software market is growing rapidly, with its value expected to extend from $11,071.6 million in 2018 to a projected $20,408.0 million in 2026, representing an annual growth rate of 8.02%, in line with Fortune’s business insights. This trend shows how essential these tools have change into in effective financial management.
3. Seek skilled help
Navigating the tax rules might be difficult, especially when dealing with complex back tax issues. Hiring a Certified Public Accountant (CPA) or Certified Tax Resolution Specialist (CTRS) might be invaluable. These professionals have the knowledge and experience to barter with the IRS on your behalf, potentially reducing your tax liabilities and penalties. They can even provide invaluable guidance on organizing your financial records and ensuring that all documentation is accurate and complete, which will prevent future tax problems.
I have seen many entrepreneurs significantly reduce their tax burden by using skilled help. Understanding the nuances of tax law and having someone who can communicate effectively with the IRS can make a huge difference. Even with a master’s degree in taxation and 30 years of experience, there are certain returns that come into my office for which I need to either collaborate with other professionals or even consult with one other skilled who specializes in the client’s industry. Understanding your limitations is the key to empowerment. Taking on a really difficult case may require skilled help because making a mistake might be quite costly in the type of IRS penalties and interest.
That said, unless you have something unusual or confusing, many tax returns are inside your reach to arrange yourself, especially with the help of tax preparation software. I would not recommend preparing your tax return with pen and paper, even if it’s easy. Unfortunately, the complexity of the tax system has regularly worsened over the years with no end in sight.
4. Communicate effectively with the IRS
On May 2, 2024, the IRS released an update to its data Strategic operational planwhich describes the implementation of the Inflation Reduction Act (IRA). This update details the IRS’s plan to just about triple the variety of audits for large corporations with assets exceeding $250 million, increasing from 8.8% in 2019 to 22.6% in 2026. Additionally, the variety of audits for large, complex firms personal income will increase to 1% from one tenth of a percent. In the face of those changes, it has never been more essential to stay vigilant and maintain diligent financial records to be fully prepared for a thorough audit.
When you are able to approach the IRS, preparation is key. Start by requesting a tax transcript to get a clear picture of what the IRS knows about your financial situation. Be honest and open in your communication. Explain the reasons for delinquent taxes, whether because of economic hardship, surveillance, or other aspects. The IRS is more more likely to cooperate with you if it sees real efforts to resolve the issue.
By taking these steps, entrepreneurs can turn outstanding tax issues into a manageable process, paving the solution to financial stability and peace of mind. Remember that the most vital thing is to act now and seek the right help to beat these challenges.