When you owe the IRS

Although the last bill anyone should ignore is a tax bill, this is exactly what happens in a number of industries – including the aggregate industry.

So, what will happen to your business if you ignore a tax bill? And what should be done if those taxes can’t be paid on time? It is well documented that the Internal Revenue Service wants its money immediately, and it has a number of tools at its disposal to collect any and all tax debts. Lesser known are the legitimate options that can help avoid the trouble, interest and penalties that accompany unpaid tax bills.

Penalties

Among the coping strategies when tax payments will be late – or cannot be made – are procedures for requesting payment extensions, as well as installment payment arrangements to stave off the IRS collection process (i.e., liens, property seizures) against the crushed stone, sand and gravel business or its owners.

The IRS is only too happy to calculate the penalties and interest for all unpaid tax bills because few taxpayers are aware that there are, in general, three separate penalties:

• Failure to file penalty
• Failure to pay penalty
• Interest

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. “Failure to pay” the taxes by the deadline usually results in a penalty of half of 1 percent of the unpaid taxes. This penalty applies for each month, or part of a month, after the due date and begins accruing the day after the tax-filing due date.

The rate for a corporate underpayment is the federal short-term rate plus 5 percentage points. Both penalties begin accruing the day after the filing due date and are in addition to the interest charged for all late payments.

Fortunately, 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 penalties and interest grow, many crushed stone, sand and gravel business operators 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.

When loans from suppliers, executives or the operation’s owners or shareholders are not available, a loan from a bank or other commercial lender might be the answer, although it’s unlikely such loans would 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 using either a personal or business credit card, including the fact that it is convenient. An aggregate business or its owners can file early and make payment by credit or debit card. Later payment of the credit card bill delays the out-of-pocket expense.

Credit card loans are likely to carry high rates of interest – interest that, in most cases, is not tax deductible except by the aggregate operation or business. Also, be mindful that not all IRS tax forms are eligible for payment with credit or debit cards.

Federal tax deposits, for example, cannot be made using the credit card option. 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.

Although the IRS does not receive or charge any fees for card payments, service providers charge convenience fees. While the IRS cannot pay or reimburse any convenience fee to taxpayers, service providers’ convenience fees are tax-deductible business expenses.

This year, all three of the authorized payment processors accept payments using digital wallet services. All three accept American Express Checkout and Visa Checkout, while Pay1040.com and PayUSAtax.com accept Mastercard’s MasterPass. PayUSAtax.com also accepts Android Pay and Samsung Pay.

Credit card payment of taxes has long been touted as a way for individuals to earn rewards, such as frequent flyer miles. Still, card issuer rewards are usually only 1 percent of the amounts spent while the third-party convenience fee could top 2 percent.

Before using plastic to pay tax bills, compare the cost with other options such as an IRS installment agreement.

Installment agreements

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, other payment plan options exist, although the IRS must first determine eligibility. Unfortunately, the cost doesn’t stop there. Even with an installment plan, most will pay a late penalty of 0.25 percent per month until the debt is paid in full. Interest, compounded daily, must also be factored in.

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 aggregate businesses and their operators use 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. The IRS might be willing to settle a tax bill for less than the full amount if:

1. The owner or the aggregate business is unable to pay the full amount;
2. There is doubt as to how much the tax liability is;
3. Collection of the liability would create economic hardship; or
4. Due to exceptional circumstances, such as a medical condition that prevents proper management of financial affairs or reliance on erroneous advice from the IRS.

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 extension may be arranged. A short-term extension gives a crushed stone, sand and gravel business or its owner 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 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 in excess of the amount shown as due 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.

In a related area, the IRS provides penalty relief for aggregate businesses that can show they have made a good faith effort to comply with reporting requirements. No penalties will be imposed for incorrect or incomplete information – either on statements furnished to individuals or returns filed with the IRS – if it can be shown a good faith effort was made to comply.

Penalty relief is not available to aggregate businesses that fail to furnish statements or file returns, missed applicable deadlines or otherwise are not making a good faith effort to comply.

Naturally it is not enough to show that it would just be inconvenient to pay a tax bill when due. Payment must be shown to be a real hardship.

Serious consequence avoidance

No aggregate business or business owner should allow an inability to pay their tax liability in full to 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, aggregate businesses and/or their owners have several alternatives for 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 as strategies.

The complexity of the tax rules and the many options available to every aggregate operation and business owner unable to pay their tax bills obviously require professional guidance.

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Mark E. Battersby is a freelance writer who has specialized in taxes and finance for the past 25 years.