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Successfully Dealing With
The IRS For Small Business Tax Debts

© by Fred W. Daily

"Creditors have better memories than debtors."— Benjamin Franklin

The IRS likely has the best memory of any creditor. Congress has given the IRS enormous legal powers to collect past due taxes — tougher than any other bill collector you’re ever likely to face, with the possible exception of the Mafia.

The IRS can seize just about anything that you own, including your bank account, home and wages. The IRS doesn’t need a court order or judgment before closing your business and grabbing your property. In most cases, the IRS only has to send you a form "demand letter" before it acts — and in special cases, it isn’t compelled to give you any warning. The IRS can effectively close down your operation by seizing your assets -- business accounts, desks, inventory -- and padlocking your doors.

Now that I have your attention, the awesome IRS collection machine won’t crush you if you know how to exercise your legal options. For instance, you can bargain for more time to pay or maybe for a reduction of the amount owed. Or, if your financial situation is truly dire, request to be temporarily placed on "uncollectible status" till you get on your feet. With all of these solutions expect to have to do some convincing to the IRS.

One crucial thing to remember, if you’re behind on taxes and want to stay in business, is to keep in touch with the IRS. You are a sitting target. A business can’t run. The worst thing you can do when behind in your taxes is play ostrich. The IRS might leave you alone for a while, but usually pops back up at a most inopportune time.

Father Time is especially cruel to tax debts — they grow larger every day with mounting interest and penalties. Currently, most tax debts are compounding at 14%. Unless you are out of business, flat broke, unemployed and likely to remain that way, IRS tax collectors will be hovering.

On the plus side, the IRS collection machine is slow to start and react, which gives you time to strategize. You’ll get a raft of computerized tax bills and maybe IRS telephone calls, too. It might be months or even several years before you have to confront the IRS face-to-face. With limited personnel, the IRS tries everything else before assigning a real person to your case. Don’t get too comfortable, though, just because no one knocks on your door. Every year the computerized IRS collection system gets faster. Computer-generated tax liens and levies can make your life every bit as miserable as human collectors can.

Here are five things to keep in mind for success in handling a tax bill with the IRS.

  1. In most cases you should cooperate with the IRS in providing financial information to a collector. However, full disclosure can be hazardous to your health. Never lie to the IRS, but you don’t have to disclose anything about your finances or assets to the IRS collector unless you are formally served with a summons.
  2. The IRS often threatens, but rarely shuts businesses down. In these few instances, it is usually for unpaid payroll taxes.
  3. Most tax debtors are allowed to pay off old tax bills in monthly installments, but interest and penalties are always running.
  4. About one in four folks can make a deal with the IRS to settle a tax bill for pennies on the dollar through the Offer in Compromise process. But, this is never easy, it is a lengthy, formal process.
  5. Regardless of what the IRS may tell you, filing for bankruptcy can reduce or wipe out some tax debts. The rules are complicated, but worth checking out as a last resort.

By: Frederick W. Daily, Tax Attorney,
John Raymond, Bankruptcy Attorney, and
Allan H. Rosenthal, paralegal.
All of the three have offices in San Francisco.

© 1997

(This article was originally written for tax practitioners who represent clients before the IRS. But the information presented here is valuable for all taxpayers.)

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