Over the course of my career, I have become aware of the fact that most of the people who end up with tax problems are entrepreneurs rather than wage earners.
It’s not inherent in the entrepreneurial DNA-- it’s more a result of being in survival mode. For one thing, wage earners have taxes withheld from their pay whereas business owners usually make estimated tax payments. It’s easy for those quarterly payments to sometimes get overlooked.
But there are reasons behind that.
Here’s what usually happens: A person gets tired of working for “the man” and comes up with a marketable product or service to sell. Lucky individuals will secure a massive amount of venture capital funding and live happily ever after. Or, (and here’s what usually happens), they take all their savings, maybe even cash out their retirement plan or remortgage the house to fire up the business.
It’s predictable that during its first year any business will lose money or show a meager profit. Let’s say the profit is $10,000. The owner files his tax return only to discover that he owes $1,500 in self-employment tax as well as the income tax and 10% penalty for early withdrawal from his retirement plan. And if all he’s made is $10,000 you know he’s been living on canned goods and the benevolence of friends and loved ones. So this tax bill might as well be $100,000 instead of $1,500+. He just won’t have the money to pay it.
Not only that, but his tax pro is telling him he must make estimated tax payments for the current year, the profit for which has quadrupled from the first year, but it’s still not enough to live on. He’s drowning in debt making enough to keep the top ramen in his belly and now he’s supposed to pay not just last year’s taxes but this year’s as well?
And so the cycle begins…
The Great Recession also left many small business owners struggling to make ends meet and skip payroll and income tax liabilities in favor of paying vendors and things like rent to keep the business going.
Next thing you know, that tax debt appears to be insurmountable. Then, the magical sound of a television or radio ad promising to get your tax bill down to “paying pennies on the dollar” comes on and brings a sense of relief.
Yes, there are solutions to every tax problem: installment agreements, Offers in Compromise (used to get “pay pennies on the dollar”) or being deemed by the IRS as currently not collectable. But these solutions are not automatic, there are many rules and requirements and judgments that usually require the help of a tax professional to achieve optimum results.
If you find yourself in this situation, please regard the following tips to find the best-suited tax professional:
Get Referrals. Ask your neighbors, customers, friends and relatives if they can recommend a tax professional who specifically handles tax problem resolution. Not every tax pro likes to go up against the taxman. Find someone who comes recommended and enjoys a good fight.
A tax professional does not have to be local. With modern technology, you can easily work with someone on the other side of the country. The ability to scan, email and fax documents has created a small world.
Interview the tax professional. You want to have a good rapport with the person you hire and not feel judged or uncomfortable in any way. The tax pro should take down your history as a part of the evaluation process, not as a means to reprimand you for not having filed or paid taxes. A judgmental tax pro might not be willing to go to the wall for you.
Be ready to clearly explain your circumstances. A legitimate tax pro will not tell you that you are a candidate for an offer in compromise without first evaluating your financial circumstances. If the first words you hear from a tax pro are “what’s your credit card number?” you might as well hang up. A brief consultation is in order followed by a financial evaluation. Make sure to bring details about your bank balances and other assets, debt, living expenses and income to allow the professional to determine if you are a candidate for an offer in compromise or another resolution. There will be a fee for this service that should be reflective of about two or three hours of work.
You aren’t going to jail. I received a call last week from a distraught taxpayer who was told he could land in jail for his tax woes. I was aghast. An IRS agent once told me that the agency would much rather have taxpayers out there working, making money, paying taxes than sitting behind bars. If they jailed everyone who ever had a tax problem, you might as well put barbed wire around the country. If a taxpayer is repentant and cooperative, the IRS will also be cooperative. They are glad to help those who step forward to tackle the problem. Once a year they will jail a celebrity, but that is merely a gambit to instill compliance in the general public.
Bonnie Lee is an enrolled agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter and on Facebook.