New businesses commonly face tax problems and restaurants are no exception. By the time you pay your waitstaff, your vendors, and your rent, you may have a difficult time paying your taxes. Sometimes, restaurants have less profit during their first year in existence, and so they have a relatively small tax bill. If business improves as more and more diners find your restaurant, your profits may increase, and you might find that you have an unexpectedly large tax bill with seemingly no way to pay it.
Many restaurant owners fear an IRS audit, but more commonly, restaurant owners are contacted by the IRS because they have not paid their taxes, and specifically have not paid their payroll taxes. Effectively dealing with the IRS is especially important in this situation because if it is not resolved, the IRS can close your restaurant and padlock its doors.
Payroll taxes: Payroll taxes are perhaps the most common tax problem faced by restaurant owners. Payroll taxes that are withheld from employees’ wages must be deposited with the Internal Revenue Service. This is done by making an electronic fund transfer using the IRS’ Electronic Federal Tax Payment System, or EFTPS. If they are having difficulties paying their bills, some restaurant owners are tempted to use these funds to cover the business’ expenses. However, if a restaurant does not properly withhold from its employees’ wages, and pay the taxes over to the IRS, any person in the restaurant who had the authority to pay the taxes to the IRS and took part in the decision to pay business expenses instead, is potentially subject to personal liability for these unpaid taxes. The IRS may assert the “Trust Fund Recovery Penalty” against these “responsible persons” making them liable for an amount equal to the amount of money deducted from employees’ paychecks but not paid to the U.S. Treasury. 26 U.S.C. § 6672(a).
Resolving Tax Problems: If you, or your restaurant, are contacted by the IRS, there are three steps you can follow to resolve your tax problem so that you can get back to business.
First, find out how much the IRS asserts that is owed. If your restaurant has received a letter from the IRS about an amount it owes, you can call the number at the top right corner of the letter, or you can call the IRS at (800) 829-3903, to get copies of your restaurant’s account transcripts listing all of the periods and amounts owed. If, instead, you are contacted by an IRS Revenue Officer, they will usually come to your place of business and they will tell you the kind of tax liabilities owed, the tax periods in dispute, and the amount owed to the IRS.
Second, if you would like to reach an agreement with the IRS to reduce your taxes or make payments, you must first file any delinquent tax returns, and stay current with your payroll tax liabilities and federal tax deposits.
- Dealing with Unfiled Returns: If you or your business neglected, or were unable, to file a federal income tax return for any previous year, there are a number of advantages to filing the tax return now. You can limit penalties and interest, claim a federal tax refund for a prior tax year that is not barred by the statute of limitations, and avoid delays when applying for loans by having tax returns to provide to the lender. If the IRS has filed substitute for returns on behalf of your business, you may be able to substantially reduce the amounts it owes by filing returns with the business’ expenses. Filings past tax returns may also prevent IRS collection actions.
- What if you have never filed a tax return? Pursuant to IRS Policy Statement 5-133, IRM 184.108.40.206.18, the IRS has a policy of requiring tax returns for only the past six years as long as the taxpayer's failure to file the required return or returns was not willful and there are no indications of fraud. If it is before April 15, you will also have to file your tax return that is due by April 15 for the previous tax year, for a total of seven tax returns.
Third, you should evaluate your options, and create a plan to pay and/or reduce your income tax liabilities. If you are unable to pay your basic living expenses, you may be eligible to be placed in currently-not-collectible status so that the IRS will not collect from you unless your circumstances change. Or, you may be eligible for an installment agreement by which you can pay the amount due over time. Depending on the amount you owe, you may or may not need to provide the Internal Revenue Service with information about your finances to qualify for one of these payment plans. Finally, if there is a large amount due and you are financially unable to pay the entire balance, you may be able to reduce the amount owed with an offer-in-compromise.
- Currently-Not-Collectible: If a taxpayer cannot pay the amount they owe due to their current financial situation, but they are able to stay current with their present taxes, the IRS may agree to place its account in Currently-Not-Collectible (“CNC”) status. While an account is classified as CNC, the IRS generally will not engage in collection activity. The IRS will not levy on its assets and income. However, the IRS will still charge interest and penalties to the taxpayer’s account and may keep any tax refunds to which it is entitled and apply them to its tax debt.
If the IRS puts an account in Currently-Not-Collectible status, due to economic hardship, the IRS must immediately stop all collection activities including levies and garnishments. Generally, the IRS can attempt to collect taxes for up to 10 years from the date they were assessed, though the 10-year period is suspended in certain cases. While a taxpayer is in CNC status, the 10-year statute of limitation on tax debt collection continues to run. Once it expires, the IRS can no longer collect the tax debt. However, the IRS will review the business’ income annually or every other year to see if its situation has improved. If it becomes able to pay, the IRS will take its account out of CNC status and expect it to pay.
- Installment Agreements: If your business does owe taxes to the Internal Revenue Service, it may be eligible for an installment agreement. Operating businesses which owe less than $25,000 in employment taxes may be entitled to “express” installment agreements if they fully pay the taxes within two years. Businesses which owe less than $25,000 in income taxes may be entitled to pay within six years with “streamlined” installment agreements. A sole proprietor who has gone out of business and owes less than $100,000 may also be entitled to a streamlined installment agreement. If a business owes more than these limits, it may pay down the liability before entering into the agreement in order to qualify. Installment agreements for larger tax liabilities will need to be negotiated with an IRS Revenue Officer. All installment agreements require that the business be current with paying its federal tax deposits and filing all of its tax returns. The business also must continue to file all tax returns and pay the taxes due while the agreement is in effect.
- Offers-in-compromise. If your business does not have substantial income and/or assets, an offer-in-compromise may be an option. Offers-in-compromise are often advertised on the radio as a way to reduce your tax debts. If a business is unable to pay the taxes it owes to the Internal Revenue Service, or if doing so would cause the business to be unable to pay its other liabilities, an offer-in-compromise may allow that business to settle its tax debt for less than the amount owed. To be eligible to make an offer-in-compromise, a business must be current with paying its federal tax deposits, filing all its tax returns, and must not currently be in bankruptcy. To compromise a tax debt with the IRS, one must offer the IRS a specific amount to settle all outstanding tax liabilities. This amount is based on the equity in the business’ assets and/or its expected monthly future income during the next two years. A denial by the Internal Revenue Service may be appealed to the IRS Office of Appeals.
Finally, schedule time with someone so you can make an informed decision about what to do. If you find you are in trouble with the IRS, it is a good idea to talk to a knowledgeable professional to help you. A tax attorney with training and experience in settling IRS disputes will know how to achieve the best possible resolution of your tax matter. And make sure that your advisor has an action plan which will achieve your desired outcome.