In the world of taxes, small business owners really have a tough row to hoe. Between managing day-to-day operations, dealing with the employees, and ensuring business growth, taxes become a weight on the shoulders of many small business owners. Sometimes, even while working endlessly and faithfully in accordance with tax regulations, unexpected occurrences may lead a business to be unable to pay its taxes, with tax debts that feel impossible ever to settle. In such cases, a tax settlement may be just the cure that a small business needs.
But let's take a close look at this: what is a tax settlement, and how could it help the small business? In this blog, we shall look at what tax settlements are, how they work, and how they specifically help small businesses when dealing with tax debts.
What Exactly Is a Tax Settlement?
Tax settlement can be understood as an agreement executed between the taxpayer and the small business owner or entity and tax authority, such as the IRS. This agreement allows the taxpayer to discharge and pay the tax not fully owed to him. Such a settlement could serve as a lifeline for a business unable to remit full tax payments due to financial constraints.
However, it cannot be said that the tax settlement completely obliterates the taxpayer from any and all binding decisions. The payment plan providing terms for a settlement depends on circumstances under which the entire burden to be borne by such a debtor gets lessened in some way, be it payment extension, extending the time period allowed for payments, or somehow ensuring a more manageable repayment plan.
Tax Settlement Process
Tax settlements are not an altogether one-size-fits-all process; rather, they include several steps erected through the probability of the economic condition of the taxpayer.
1. Determining Qualification
Before the business can bring forth a tax settlement application, its eligibility must be determined. Usually, tax authorities like the IRS would grant a tax settlement only to those individuals facing economic hardships or certain circumstances, rendering them incapable of making the full tax debt payment. In such cases, unexpected business loss, ailments, and other serious financial shackles could pry a tax settlement from tax authorities.
2. Selection of Tax Settlement Plan Most Appropriate
Some of the sure tax settlement plans include:
Offer in Compromise (OIC): The most famous tax settlement whereby the taxpayer offers a certain lump-sum payment lower than the amount owed. The IRS agrees to accept the sum as the final discharge of indebtedness.
Installment Agreement: In those cases where the taxpayer may be unable to make payment in full, he or she may choose to request a long-term installment agreement allowing him or her to pay off the tax liability over time, allowing her or him to make manageable payments.
Currently Not Collectible (CNC) Status: In some very odd circumstances, the IRS has also deemed the companies unable to pay a single cent and temporarily suspended efforts to collect funds until the company's financial position improves.
3. Submission of Documentation
Having determined the correct plan of settlement, the business owner shall then prepare and submit extensive financial documents to the tax authority. Generally, these include income statements, balance sheets, and other financial documentation designed to supplement the tax authorities' ability to evaluate the vast value that would allow such businesses to repay their due tax.
4. Negotiation and Resolution
When the authorities are done reviewing the documents provided, they will then approve the settlement proposal or provide a counter-proposal.
The Significant Benefits of Tax Settlement for Small Businesses
Having established how tax settlements operate, it is essential for small businesses to know what they can actually gain from such settlements when in a pinch with tax debt.
1. Reduced Tax Debt
A significant benefit of a tax settlement is an abatement of the amount due. For a highly indebted business, this reduction offers immediate financial relief. For instance, in the case of an Offer in Compromise (OIC), the IRS may accept a sum considerably less than what was owed. Thus, the business will have some funds to put back into its operation.
2. Flexible Payment Options
Settlements allow repayment options to be more flexible if the business that is in this challenging situation cannot afford the payment in its entirety. A common form of repayment is an installment agreement, which allows the business to pay the tax over time in reasonable amounts. The ultimate benefit for a business, as this spreads the burden of recovery, is to lift a little bit of the financial pressure from appeals.
3. Preventing Extreme Consequences
Tax debt, if unresolved for an extended duration, can lead to dire consequences. These include wage garnishments, bank levies, property liens, or even closure of the business. A tax settlement assists in avoiding these extreme actions as a business can seek and arrange for a payment plan. Businesses that have successfully entered into settlements very often do live with no fear of being hit with a tax lawsuit and continue with regular business.
4. Keeping Your Credit Standing Clean
For a small business, credit is everything. Tax debt can heavily vitiate one's credit score, complicating issues such as loan applications, lines of credit, or obtaining favorable financing payment terms thereafter. After settling and closing with the taxing authority, the business can start to put off filling in the patch on the lost credit to proceed with the improvement thereof in order to access future financing.
5. Protecting a Business
The restlessness from the tax debts can interfere with the ability of the business owner to manage effectively, which might raise negative reports on the firm as a whole. Settling the tax debts will help the business owner divert attention back to operations, managing employees, and serving customers, and thus productivity increase and general success.
6. Clear Way Out of Debt
A tax settlement must provide a small business with a clear road to recovering from its financial dilemmas and leave the owner free to plan for the future ahead. Tax settlement must allow the small business to clear its tax dues and let it start a fresh outlook on finances to make plans with a certain level of confidence.
The Tax Settlement Dangers
Although a tax settlement can prove advantageous to the owner, some risks and issues must be considered by that small business owner: a tax settlement will not be guaranteed. Such a thing exists if the IRS or other tax authority rejected the Offer in Compromise or the Offer accepted would need more documentation submitted, which would further stall the process.
An attempt at settling a tax debt may have tax consequences, specifically if the canceled portion of the payment obligation is treated as income. This means that potentially if the business successfully negotiated a settlement for the debt, it could trigger additional tax liabilities.
The cost of professional help: While tax professionals can negotiate better terms on behalf of a business, they usually charge hefty amounts for their services. Small businesses should consider doing it themselves when weighing the pros and cons of hiring an expert.
Are tax settlements put through for small businesses?
A tax settlement may be a great relief for a small business dealing with or owing tax debts, but it may not necessarily be the right choice for every other business. If the business is facing a huge tax bill and cannot afford to fully pay it, a tax settlement may be able to help decrease the burden. Just be sure to sit down, think all of this through, and consult an expert tax professional before you make a commitment.
Wrapping It Up
Tax settlement is a powerful opportunity for small business owners struggling with outrageous tax debt. They can negotiate directly with the IRS and/or the tax authorities to mitigate the tax amount due, influence a more manageable repayment schedule, and prevent more severe consequences. Although the process may be complicated, tax settlements provide an opportunity worth exploring to relieve financial pressures and recover.
So, if your small business is under the pressure of tax debt, speak with a tax professional to see if a tax settlement may just be the solution. With the right backing, your business should be able to resolve its tax issues and return to its path toward growth and success.
