How to solve tax resolution case:

We have recently started working on some accounting cleanup projects for a small construction business with roughly $5M sales a year. It turns out that the owner solely owned the business for over 10 years and has not filed his individual tax returns for the past 10 years! Sadly, this is a typical tax resolution case and not uncommon. The owner strongly desires to get back on track with compliance, which takes a lot of courage.

We thought it’s important to leave this writing so you may be able to learn from this case and stay away from troubles with the government agencies. When you do find yourself in the same out-of-compliance situation, our hope is that you know exactly what to do after reading this article.

First, let’s list a few reasons why it’s easy to get behind with taxes.

Reasons why people get behind taxes:

1. You are too busy in your business to take care of taxes.
2. You don’t have a proper framework of how income tax works.
3. You don’t have good financials.
4. You don’t know how to seek out professional help.
5. Once you are behind with taxes, it is easier to get behind another year.

If you are a business owner and behind on your taxes, the first thing we would recommend is to retain a competent accountant. If you are flying under the radar, meaning that you have not received any notice from the government, you are so lucky!! This construction owner is in the same boat. He has not received any notice from the government.

Let’s celebrate this moment of stealth flying.

But no more hiding!

Coordinate with a professional to obtain income/wage transcripts so you know what income information (e.g. W-2 and 1099s) is in the government database for those delinquent years. This process is the same even if you received tax notices from governments, except that you may need to have an accountant reach out to the agencies and communicate that catching up on tax return filings is in progress. This will get the IRS/state off your back and stop any penalties from accruing. Try to file all delinquent returns as soon as possible. You can then work with the IRS/state to set up a payment plan for the taxes you owe. The sooner you take care of this, the better off you will be. For individuals’ federal tax compliance, you need to catch up with six years of tax returns even if you have not filed in the past 10 years. We are in 2022 at the time of this blog post so you would catch up on 2016 through 2021 tax returns.

Consequences of not taking taxes seriously

If you keep ignoring taxes, someday they will assess tax penalties and interests and affect your business operation. They could take lien on your bank account, personal properties, real estates, or garnish your wages. As a small business owner, you need to protect your right to do business.

If you found yourself in a delinquent tax situation, chances are you needed to work with a accountant years ago. Do hire someone now! They can make sure that everything is properly recorded and that you are paying the correct amount of dues.

If Oregon is your home state, we have the following income tax jurisdictions and other tax considerations.

Income Tax Jurisdictions for Oregon residents:

1. Federal Income Tax
2. Oregon Income Tax
3. Oregon Trimet self-employment tax (for those who live in zip code where Trimet infrastructure lies) https://trimet.org/taxinfo/
4. Portland/Multnomah city & county income tax (if your business is domiciled within city/county or perform service within the jurisdiction)
5. Oreogn Metro Tax for Oregon metro residents (2021 tax year and forward for $125K/$200K or more taxable income earner for single/married filing jointly) https://www.oregonmetro.gov/public-projects/supportive-housing-services-tax
6. Preschool for all income tax for Portland/Multnomah residents (similar to Oregon Metro Tax – 2021 tax year and forward for $125K/$200K or more taxable income earner for single/married filing jointly) https://www.portland.gov/revenue/personal-tax
7. Oregon “CAT” – Oregon Corporate Activity Tax (Started from 2020 tax year: 0.57% tax rate on over $1M gross receipts) is a notorious gross receipt tax on businesses with more than $1M gross receipts. https://www.oregon.gov/dor/programs/businesses/Pages/corporate-activity-tax.aspx

These are income taxes (except for Oregon CAT). If you have employees, you would have to be compliant with payroll tax as well. For our recent construction client case, he was working with payroll companies to run payroll and file quarterly payroll taxes so he was good with payroll tax compliances.

Ok, you probably want to move to Florida, Washington, Texas, Tennessee or Nevada so you don’t pay state income taxes. Oregonians don’t pay sales taxes but pay one of the highest income taxes in the nation especially if you are Multnomah County residents. It’s important for you to understand tax compliance framework and what type of taxes you need to pay.

Here are a few things you need to know when you hire licensed accounting professionals/accounting firms on tax resolution:

1. Ask what type of tax resolution experience he/she has
2. Ask what license he/she has
3. What would be the timeline and game plan

The accountant you work with must have some proven track record resolving tax problems for business owners. Otherwise, you would end up teaching them how to make a phone call with the IRS. Professionals with a lot of tax resolution experience have all the nuances, tips, and tricks to solve tax problems for clients. From partial payment installment plans to an offer-in-compromise, they have done it. You would like to ask questions to see what type of experience they have.

Also, ask what type of license they have and which state monitors their license. In Oregon, you can look up CPA license and verify the status (https://www.oregon.gov/BOA/Pages/Licensee-Lookup.aspx). A CPA can represent you before the tax court and do everything from financial statements compilation/review/audit to preparing tax returns. An enrolled agent (EA) can represent you in tax cases as well. Those are the two professional licenses and credentials you would be looking for. A tax attorney also can help resolve tax issues but may not be so keen on business financials.

Once you decide who you work with, you would like to set up a timeline expectation with a professional to get caught up with past accounting records and tax work. Ultimately, they will work off of the information you provide so it’s important to provide whatever they need in a timely fashion. How many bank accounts and credit cards do you have to reconcile? All of your Fixed assets on the balance sheet? Do you have all the pat payroll summary and details and quarterly tax reports with federal and states? Do you keep all the W-2s and W-3? How about all the loan and line of credit statements? Getting caught up with accurate financials in the past takes a lot of time and effort. You would like to routinely check the status of the project and make sure that the professional has all information necessary to get done with catch-up work.

Importance of good books (financial statements)

What comes to mind when you hear the word “bookkeeping”? If you think of “boring”, “daunting” or any type of negativity associated with the word, you need to find ways to delegate bookkeeping. Doing books right requires proper knowledge and experience. You would like to learn how to read financial statements and oversee the performance of the business by checking financial statements (profit & loss, balance sheet, and cash flow statement) but you can delegate actual execution of the bookkeeping sas much as possible to bookkeeping services provider.

At a minimum, you need to look at the financial reports your bookkeeper prepared each month so you can make good business decisions faster. This will help you understand how much revenue, expenses, and profit you had and how much taxes you need to set aside each month or quarter and strategically plan your next business move. If your business gross receipt is under $25M, you can stay cash-basis accounting per current tax law, which means your bookkeeper does not need to maintain accrual basis accounting and does not need to keep up with accounts receivable and payable management. Cash basis accounting is way more manageable than an accrual basis. A bookkeeper you work with should be trustworthy and consistent, someone you can count on. You would not like to take this role lightly. Ultimately, lacking cash flow would put you out of business. Having a good financial statement means that you pay due diligence on your business cash flow each month and reduce expenses and taxes owed. Those who pay attention to the business performance and track numbers ultimately win the market.

What happens after catching up on tax returns?

So you are finally caught up with all the past years’ financials and tax return filings. Now what? You work with the IRS and settle tax debt. Here are some considerations for final step of tax resolution.

1. Partial Payment Installment Plan
2. Offer In Compromise
3. Payment Plan

When you have a thriving business, typically the first two options above are out of the picture. Why? When you own a business with positive cash flow, the IRS regards your personal financial standing as sufficient to pay off the entire tax debts. It’s true that when you don’t have much income or financial assets such as real estate, you would have better chances to settle with less than what you actually owe. There is a first time penalty abatement with the IRS. In case you owed a return from 5 years ago, you can ask for the penalty wavier and it’s likely to be granted. In the past, we have dealt with this type of case and settled 10 cents on a dollar the client owed. It’s case by case. Many times, people have to set up payment plans and pay off the exact amount they owe. For the construction owner with $5M revenue, we ended up doing some retroactive tax planning and saved more than $67K income taxes. Ultimately, he was obligated to pay the entire amount he owed over the 6 years of tax returns.

In summary

You may find yourself in a similar story to this construction business owner, but just know that your past does not have to define you and you need to do everything with your power so that the future is better for you. I hope this blog post is helpful to learn solving tax problems and if you would like to work with us, feel free to contact us and schedule a strategy session. What other questions do you have about tax resolution or bookkeeping? Let us know in the comments below.

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