Does your business owe back taxes? What to do if you cannot pay your tax liability

When you're juggling all the moving parts for your business, sometimes things don't go as planned. If your business owes back taxes to the government, you do have options. After the initial shock of getting an invoice from the Internal Revenue Service (IRS), take a few moments to recognize that it's a situation that both you and the federal government want resolved.

Fortunately, there are some options to help you get back on your feet.

What programs are available?

The IRS offers taxpayers four different options to resolve back taxes. If your predicament fits the bill, you may be able to set up your own payment plan online without ever talking to an agent or digging out a dusty shoebox of receipts. Let's take a look.

• Installment agreements. These let you pay the back taxes owed over several months or even several years.
• Currently not collectible (CNC). This is when you're in a financial position where your income doesn't allow you to pay anything toward your tax debt.
• Penalty abatements. When you've been assessed a penalty, the government may agree to waive it in certain situations. Keep in mind that you'll still be charged interest since the IRS can't, by law, make it go away.
• Offers in compromise (OIC). If the government agrees that you won't be able to pay the full amount owed, they may accept a lower amount if you agree to pay within a set time frame.

Do you qualify as currently not collectible?

To be put in currently not collectible status and stop calls and letters, you'll need to call the IRS and let them know. They'll ask you questions about your situation and could mark your account as currently not collectible for between six months and two years. You'll still owe the amount due, and interest and penalties will still be added, but you won't get any calls or invoices from the IRS continually asking you to make good on what you owe.

Are you current with filing your federal tax returns?

For the other three programs listed, the first thing needed in order to qualify for them is to be current on all your tax return filings. If you aren't, you can't participate. So if that's the case with you, take that as your first step and get caught up with filing any tax return that you haven't already taken care of. Then, check back and see which of these options might make paying your back taxes easier.

Can you qualify to have your penalties waived?

Penalty relief is normally considered as being available to people or businesses incurring a penalty from the IRS for the first time, but a more recent review of their website indicates that you may also qualify if you haven't received a penalty within the last three years. In either scenario, you also need to have finished paying your back taxes and interest in full or have made arrangements to do so. You can learn more about penalty relief from the IRS.

Will you be able to pay over time with an installment agreement?

Whether you qualify for Installment Agreements depends on a few factors. First, you need to be current with filing all past tax returns and any current year filings and payments that are required of your business. Next, installment agreement criteria are split off depending on the type of business entity you have.

If you are a sole proprietor or independent contractor, the payment plans you have available are the same as those set for individual filers. Another way to look at it is if you file a Schedule C with your 1040 tax return. If you do, then you would be eligible for the individual filer plans. If not, you'll follow the guidelines available to business filers. You can learn more about the payment plans and their fees from the IRS.

Is an offer in compromise right for you?

Being able to pay less than the amount you owe isn't offered to everyone. The process is quite extensive and will likely take months to get reviewed and potentially approved. While the process can be arduous, it is the right choice for some who no longer have enough income to support their taxes owed, and they don't see that changing in the near future. You'll select an option within the application to either pay a lump sum or periodic payments over up to 24 months, and you'll be asked to make a deposit.

If you've got an open bankruptcy case or are behind in filing your current year's returns or in making quarterly deposits for your employees, then your offer is likely to be rejected. The same is true if the IRS believes you'll be able to pay your back taxes in the future.

Remember your options

These four programs, while not perfect for every situation, do offer millions of businesses and individuals the opportunity to put their back tax situation behind them and free them up to look toward the future.