Whoops – You’re Behind on Your Taxes
Procrastination happens to the best of us. To-do lists become overwhelming, time is limited, and things just get pushed back. While we certainly understand this happens, don’t let your procrastination snowball into bigger issues. Some issues, like sales tax compliance, can have serious repercussions if a business doesn’t deal with them.
If you’ve become one of those ‘I really will get to it…’ folks and found yourself behind with your business’s sales tax, don’t panic too much. The issue of sales tax compliance is a problem seen nation-wide, which is why many states are cracking down on sales tax evasion. To avoid costly fines and brutal audits down the road, we’ve compiled some options for how to deal with sales tax when starting from behind. We hope you find this helpful. Feel free to reach out if you have specific questions. (You wouldn’t be the first person that’s needed some guidance with sales tax!)
What happens when/if your account is behind?
When you’re behind on sales tax, your account becomes ‘delinquent,’ which means the state notices that your business is paying an unusual amount of taxes compared to another business of similar size. This could be a result of overcharging or underpaying sales tax. Both of these aren illegal and can mean in hefty fines down the road.
If your account is declared delinquent, note the following:
- Penalties and interest will begin to accrue on any unpaid tax until you pay the balance in full.
- Failure to respond to notices from the Revenue Department results in a Revenue Agent placed in charge of your collection.
- At this point, the Revenue Agent assigned to your account will contact you by telephone, letter, or in person to resolve the situation.
What happens during the collection process?
- The Revenue Department may issue an assessment followed by a tax warrant covering any and all unpaid taxes, penalties, and interest.
- If a tax warrant is not paid a certain amount of days after the issue date, it is filed with the court specified by your state that handles such matters.
- A filed tax warrant establishes a lien against your real and personal property and enables the Department to seize property (bank accounts, wages, personal property) to pay the debt.
- If a filed tax warrant remains unpaid after 30 days, a hearing to revoke your business’s tax registration may be held.
The collection process can be a gigantic bummer and could result in you losing energy you’ve put into your business. Keep in mind, though, no one wants this to happen, including Revenue Agents. They’re people too, plus they want you to continue to collect taxes on their behalf.
Many states are willing to let you make installment payments if you get behind on your sales taxes. If this happens, you’ll typically be required to keep current on any new monthly or quarterly tax filings and payments.
Your best course of action, always, is to respond to any notices of delinquency immediately. If you cannot pay in full, file the return anyway, and send some money along with a request of any kind, handwritten or typed, to work out a payment plan.
When to Ask for a Voluntary Disclosure Agreement or VDA
For some folks, the bill is a bit bigger than a payment here and a payment there. Maybe you’ve never even paid sales tax, and worry about how to go about catching up before getting caught. (No need to hold your head in shame! There is a solution!)
Enter Voluntary Disclosure Agreements (VDAs) to save the day. As part of these programs, an unregistered business that has never paid sales tax can come forward, raise their hands, and say ‘my bad.’ Doing this means a business faces less severe consequences than if the Revenue Department discovered the non-compliance.
Benefits of Voluntary Disclosure
As part of a VDA, the “look back” period of noncompliance is limited to a few years (usually 3 – 5 depending on the state in which you are seeking a VDA). In addition to a limited “look back” period, penalties and interest are often partially or fully waived. A few states fully waive interest! This waiving of fees can be significant, which is even more of an incentive to take care of business.
However, (dun, dun, dun) if the Revenue Department’s discovers your-your business in an investigation, examination, or audit procedure, you’ll be liable for all those tax, interest, substantial penalties, and the “look back” period. Hint: It’s not worth the risk!
Who Is Eligible for the Program
Typically to qualify for a full voluntary disclosure program a business must have:
- Never registered with or reported taxes to the Department;
- Never been contacted by the Department for enforcement purposes (e.g., audit or compliance contacts regarding registration or reporting requirements); and
- Not engaged in evasion or misrepresentation in reporting tax liabilities.
(Note: If a business currently registered discovers it has underreported its tax obligations, it does not qualify for a Voluntary Disclosure Agreement.)
Once your tax liability has been determined, the Department you’re entering into an agreement with will prepare a tax assessment with penalties, if applicable, and interest. After amounts are negotiated and agreed upon, the assessment will be submitted for processing, and you’ll receive an invoice. The collection agency must receive payment in full as the instructions given. Additional interest and late payment penalties can accrue if the assessment isn’t taken care of by the due date.
You and your business aren’t doomed if you’re behind on sales tax. However, don’t procrastinate! Deal with these issues now so you don’t risk your business and its future. Once you’ve caught up, things get even easier. Automated sales tax software, like Taxify, keep you from ever having to worry about falling behind again.
Have some more questions? Let us know! We’re happy to help, and we love talking taxes.
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Stay on top of the sales tax challenges your business faces with Taxify by Sovos.