Running a business comes with endless responsibilities – managing employees, juggling cash flow, serving customers, and keeping up with industry trends. With so much on your plate, it’s not uncommon for tax obligations to fall through the cracks. Unfortunately, unpaid business taxes can trigger serious consequences.
If you’re behind on your tax payments, don’t panic. In this guide, we’ll explain how to handle business back taxes, from understanding your situation to taking action – and getting your business back on track.
Why Business Owners Struggle with Taxes
The U.S. tax system is complex. With varying tax forms, quarterly estimated payments, payroll obligations, and constantly changing rules, even the most diligent business owner can make mistakes. Missing a deadline or miscalculating tax liability can quickly spiral into larger problems, especially if you ignore the warning signs.
What Happens If You Owe Business Back Taxes?
Failing to pay your business taxes can lead to several consequences from the IRS and state tax agencies, including:
- Accruing interest and penalties that grow your debt fast
- Tax liens on your business or personal property
- Levies and asset seizures, including business bank accounts
- Suspension or revocation of business licenses or permits
The longer you wait, the more aggressive the IRS or state will become. Fortunately, there are steps you can take to resolve your unpaid tax debt and move forward.
How to Handle Business Back Taxes: Step-by-Step
Step 1: Assess How Much You Owe
Start by gathering the following:
- IRS and/or state tax notices
- Copies of past tax returns
- Financial records, including profit & loss statements
- Payroll records (if applicable)
If you’re unsure of your balance, log in to your IRS account online or contact your state tax agency. You may also want to consult a tax professional to help you evaluate the total amount due and avoid further mistakes.
Step 2: Know Your Options to Resolve Business Tax Debt
Once you’ve determined what you owe, explore these IRS and state tax resolution options:
- Installment Agreement (Payment Plan) – Set up monthly payments to pay off your debt over time. This is one of the most common and accessible solutions.
- Offer in Compromise (OIC) – This allows you to settle your tax debt for less than the full amount if paying in full would cause financial hardship. It’s hard to qualify for but worth considering.
- Currently Not Collectible (CNC) Status – If your business is financially unable to make payments, the IRS can temporarily pause collection efforts. Interest and penalties still accrue while in CNC status, but it buys time.
- Penalty Abatement – If you have a good reason for falling behind (e.g., illness, natural disaster), you may qualify for first-time penalty relief or reasonable cause abatement.
A tax professional can help you determine which option is best based on your financial condition and the nature of the debt.
Step 3: Create a Plan to Pay Your Back Taxes
Here’s how to start paying your unpaid business taxes strategically.
- Evaluate Cash Flow. Analyze your revenue, expenses, and profit margins to decide how much you can reasonably afford to pay toward your tax debt.
- Cut Costs or Boost Revenue. Explore ways to reduce operational expenses, renegotiate contracts, or generate additional income streams to free up cash.
- Hire a Tax Professional. Enlist a CPA or tax resolution expert who understands IRS processes and can represent you during negotiations. It’s a worthwhile investment if your tax issues are complex.
- Stay Consistent. Make payments on time. Set up auto-pay if possible and keep documentation for everything you submit to the IRS or state.
Step 4: Stay Current with Future Tax Obligations
Fixing the past is only half the battle. The IRS won’t approve most repayment plans or settlements unless you’re current with all filing and payment obligations.
Here’s how to avoid falling behind again:
- File tax returns on time, even if you can’t pay the full amount
- Make quarterly estimated payments if you’re self-employed or a pass-through entity
- Use bookkeeping software to automate and track financial records
- Meet payroll tax deadlines and remit the correct amounts
Consistency is key to staying in compliance and avoiding future debt.
Can Owing Back Taxes Affect Your Business Credit or Financing?
Yes! Outstanding tax debt can limit your access to capital.
- Tax liens are public record, which can hurt your chances of getting new lines of credit
- Loan rejections are common if lenders see unresolved IRS or state tax debt
- Higher interest rates may be offered due to increased lending risk
To improve your financing prospects, be transparent with lenders and provide documentation that shows you’re actively resolving your tax debt (e.g., proof of a payment plan with the IRS).
Final Thoughts: Take Action Sooner Rather Than Later
Owing business back taxes is stressful, but not hopeless. The worst thing you can do is ignore it. Whether you set up a payment plan, apply for an Offer in Compromise, or simply need time to get organized, taking that first step makes a huge difference.
Need help navigating your tax debt? Consider consulting with a tax resolution specialist or CPA experienced in IRS negotiations. The sooner you act, the better your chances of minimizing damage and securing your business’s financial future.