Tax Troubles
Sometimes small businesses get behind in tax payments, either on income or payroll taxes. The IRS now offers installment agreements far more freely than they did just a few years ago. There are a few basic rules you should observe. You must pay off one installment agreement before they will grant another (although you can wrap several tax obligations or several years into one installment agreement). Also, the IRS wants to see you keep current on your ongoing tax obligations, otherwise it will revoke the installment agreement, even if you are making the installment payments. Often, if you miss a couple payments, then you have lost any chance to reinstate the installment agreement or work out another until the debt is paid in full.

As a general rule the IRS will let you work out income tax installment payments over 12 months or less. Rarely does the IRS let you stretch it out beyond three years. However, for installment proposals over 12 months the IRS will want to know all about your business and personal assets and cash flow in excruciating detail (shown on form 433A for personal info and 433B for business data). Many business owners feel that this level of detail is an intrusion into their personal affairs, and can permit the IRS to dictate how little it will allow you to live on. If possible, you should try to request installment plans of 12 months or less.

Note that the IRS is extremely reluctant to let you make installment payments on payroll taxes for an ongoing business. However, it costs you nothing to ask the IRS agent if you can work out a payment plan on payroll taxes. Don't ignore the IRS notices if you are behind - especially on payroll taxes.

The IRS will typically send you three notices, the last of which says FINAL NOTICE OF INTENT TO LEVY. Then you are fair game at any time after that. The government can find and drain your bank account at random intervals as many times as it wishes until it is paid in full - often at embarrassing times, when important vendor checks will bounce all over town, or when you just made a large deposit. Contact the IRS before you get the final notice to avoid this problem. Not accepting their certified mail is not going to prevent the IRS from hurting you. As long as you talk with them and send them some money, usually you can string them along until your cash flow improves.

Tax Payment Discounts
If you are in very serious financial straits, the IRS has a program for discounting tax debts. It is called Offer in Compromise. The IRS is not required to discount your taxes, but if you have been impoverished through business reversals and still have large tax obligations, you should apply for the Offer in Compromise. Also, while the Offer is under consideration by the IRS (which often takes a full year), the IRS will suspend any collection efforts against you. Your should use this time to build up some cash (not bank balances) to pay the amount of the Offer. Please note that the IRS now charges a non-refundable "user fee" to apply for the Offer in Compromise program, even if they decide not to grant you any relief.

You will need to disclose every possible financial detail about your personal and business situation on Forms 433A and 433B along with the Offer itself. It also helps to include a statement from your state Division of Motor Vehicles on the worth of your car or truck, a certified statement of tax values on assets the county clerk or county tax department has on record, insurance company statements on policies, and any other records that will prove that your assets are worth as little as possible. You should also include three recent months of bank statements. The IRS will obtain this data from these sources anyway, so you might as well get "brownie points" and move your case along faster by including the information with the initial Offer. Also, it saves possibly blowing your Offer later when the IRS agent requests this information and gives you too short a deadline to respond.

The IRS uses a formula to set a minimum acceptable offer, although the IRS supervisor may request a higher amount at his or her discretion. The formula takes business profits (ignoring depreciation and any other non-cash deductions) plus all personal receipts (whether taxable or not, such as gifts from family members), less certain household expenses. The IRS has tables for fixed deductions on an Offer covering general cost of operating a household. These tables vary depending on the number of people in your household. Some items such as local occupancy costs (mortgage or rent costs) are broken down by metropolitan area of the country. Note that you must include the appropriate table amounts for most deductible items, regardless of whether it actually costs you more to pay your mortgage or run your household. The IRS may require you to sell your home, default on certain obligations, or lower your lifestyle to pay the IRS more.

Outstanding loan payments are not necessarily deductible in the formula. If the debt was filed after the tax lien, then your loan payments will rarely be deductible, unless you can prove that it is essential to preserve the value of an asset or revenue stream that will help pay the IRS.