Not paying taxes results in different consequences that depend on the situation. In this article we will cover each listed below:
- Filed Your Taxes Late and Haven’t Paid Your Tax Bill
- Haven’t Filed and Owe Taxes
- Haven’t Filed But No Tax Liability
- How Paying Zero Taxes May Hurt You (Year over Year)
Filed Your Taxes Late Or Haven’t Paid Your Tax Bill
The internal revenue service is impose late fees, penalties and interest on the total unpaid tax liability.
Haven’t Filed and owe taxes
If you didn’t file and owe tax, file a return as soon as you can and pay as much as possible to reduce penalties and interest.
A late filing penalty is assessed against the partnership if the partnership fails to file Form 1065, U.S. Return of Partnership Income, by the due date, including extension. The penalty can also be assessed if the return is filed without all the necessary information (unless there is reasonable cause)
Haven’t Filed But No Tax Liability
If you have unpaid taxes then you are accruing late fees and penalties. What about not owing taxes? The IRS only imposes late fees and penalties if there are unpaid taxes.
If you haven’t filed your individual tax return, are due a refund, then there is no penalty for filing a late return after the tax deadline if a refund is due. You have up to three years from the date of filing the tax return to claim a credit or refund, or two years from the date the tax was paid, whichever is later.
For businesses, it is similarly applicable to individual returns that are due a refund or owe nothing.
How Paying Zero Taxes May Hurt You (Year over Year)
I had a past client admit that they accepted a lot of cash payments and not record it. He did this so he didn’t have to report it on their tax return (or pay sales tax). Needless to say, they didn’t remain my client.
This business owner was reporting net losses each year on their Schedule C. They also were closing the door on other opportunities.
Here are some areas that can hurt you if you are consistently paying little to no taxes.
I had a client that never could get legitimate financing. So he would open up a personal credit card, make cash advances and then repeat. He had 24 credit cards! I hated this guy. It was a bookkeeping nightmare. Having so many credit cards and maxing them out kept his credit score low, the amount of interest paid was high and the juggling of it all was exhausting.
As a business, you may have a credit score (Dun & Bradstreet). Most likely your personal credit will be the first one they will rely on.
Any underwriter will also want to see the past two years of your tax returns. If they see your business is not turning a profit (or too little), most likely you will not get approved.
Now, if you have losses caused by depreciation, but would have a good net profit otherwise. That shouldn’t hurt your chances for financing approval.
Tip: In some circumstances, having a 3rd party CPA write a letter on their letterhead validating the accuracy of the financials may be required or could improve your chances of getting approved.
I’ve had to write a few of these for clients. This is just one of the many reasons having your own CPA could come in handy. Of course, I may be a little biased.
Selling Your Business
I’ve reviewed several business financials and returns to know where I should worry. Entrepreneurs and Investors look for potential in a business. They also look out for potential risks and problems.
If after they review your financials and returns and you say well we actually made more than that. We have been evading taxes for years. You’re done. Door closed.
You immediately have demonstrated to the potential buyer that you are not honest and nothing you have given them can be trusted. Moral and ethics aside, being dishonest is costly.
On the other side of the coin, if you have losses reported accurately, then you need to make sure it isn’t because your business sucks.
The purchaser will look at your depreciation schedule, salary you take, etc.
They are going to want to see how much return they can get immediately upon purchasing. They’ll try to improve the business and grow it, but it’s nice to see there’s real cash flow.
If you are always reporting losses, you are also not paying into the social security or Medicare systems.
This may not seem like a big deal, but that is always what business owners think that only care about the time at hand; never the future.
What I have also seen is that most business owners have no retirement plan or investments. Yet sometimes I will find that they’ll have a brokerage account just for fun.
Having a Solo 401K or SEP IRA not only increases your future retirement nest egg, it also can lower your tax burden. It’s tax deferred, so only taxed when taken out after you turn 59 ½.
Sad Story: I once knew a business owner that somehow always had losses on his tax returns. He one day had a stroke and in a matter of weeks his business was done.
Not only did he not have disability insurance, he also had never paid into social security ever. This meant he got nothing. No social security, no social security disability benefits. Nada.
What to do Going Forward
Maybe you were like the guy I described above. The point is you can change things going forward. If you have losses year over year and this is your main or only livelihood (and the losses aren’t being caused by large asset depreciation), it’s an indication that something needs to change.
Sometimes it’s beneficial to think of your business as someone else’s. If you aren’t looking at your financials (meaning your balance sheet, profit and loss, and cash flow statement) at least once a month (once a week is suggested), that’s your problem right there.
I’ve had clients that hadn’t done their bookkeeping for over 3 years! They just look at the bank account and see how much money they have (or how little). That is not planning. That is surviving like an amateur. Large businesses have failed with far more resources and skills.
As a business owner, it is important to understand the benefits of each side paying little to no taxes versus having a very profitable business and paying more:
This is mainly focused on those that report business on their personal tax returns. It’s applicable to all businesses though.
As your net profit increases, you may want to consider restructuring your business tax treatment. This will include when to set up a payroll system (even if it’s only you). I discuss payroll analysis for small business in another post called “When Businesses Should Set Up Payroll.”