At What Point Does a Tax Lien Become a Criminal Matter?
If you’re like most Americans, there are very few things that inspire as much fear as receiving a notice from the IRS. This is especially true for business owners when they’re forced to deal with a federal tax lien. The prospect of dealing with the IRS is bad enough, but it becomes even worse when you think you might lose your business, be subjected to heavy fines, or even end up going to jail.
An Important Distinction to Keep in Mind
Fortunately, it’s very unlikely that your tax lien will become a criminal matter. This is true for two reasons. First, there’s a clear distinction between an IRS tax lien and a case involving criminal prosecution. In other words, a number of avoidable events have to happen before a tax lien crosses into the criminal realm. The second reason you have little to fear is that tax liens almost never become the cause for prosecution.
The best thing for a business owner who’s worried about the aftermath of a tax lien is to learn more about the subject of tax liens in general. It all starts with understanding what a tax lien is and how it can affect your business.
How do You Define a Tax Lien?
You can find a detailed description of the term right here, but there’s a fairly simple way to describe the basics of a tax lien. If the federal government has a tax lien against your business, then the IRS has to be paid first if your company somehow becomes insolvent. In reality, a tax lien is just the initial step toward the IRS collecting the money it’s owed.
Yes, a notice informing you that the feds have put a tax lien against your business can certainly inspire a lot of fear in the average business owner. However, there’s no need to panic-- the IRS usually gives business owners plenty of time and options to pay the debt.
How Did My Business Get a Tax Lien in the First Place?
If your inability to pay your debt to the IRS is business-related, then they’ll put a tax lien on your company’s assets. In some cases, however, the IRS might choose to hold company executives responsible for the total amount of the debt.
The IRS assesses millions of taxpayer fines every year, and a large majority of them are levied against companies just like yours. A failure to file and/or pay payroll taxes is the most common reason the IRS delivers these penalties. This is because far too many new business owners don’t understand the federal rules that govern payroll taxes or don’t know what to do when they need to pay their back taxes. Unfortunately, the IRS takes payroll tax failures very seriously.
When a Business Owner Does What They Think They Have to Do
Even if a firm does understand its tax obligations, they might still experience times when they lack the necessary funds. When this happens, some business owners operate outside the law by working on net payroll in the hopes of saving money.
For instance, a company might owe $1,200 to one of its employees, but the actual total comes to $1,450 because of payroll tax obligations. By using net payroll, the company might pay only the worker’s net income of $900. This means that the company now owes the IRS $550, despite the fact that the employee is paid the full amount of their paycheck.
This might not seem like very much money but think about a company with a few hundred employees that hasn’t been paying its payroll taxes for several months or years. As you can see, the total debt owed adds up quickly and can create grave issues for your business.
No matter how it plays out, the problem starts because the business owner fails to file their tax returns. As you might have learned from experience, this isn’t a good idea. It doesn’t matter if you can pay or not, it’s always better if a business owner goes ahead and files their return. It’s bad enough owing the IRS in the first place, so don’t make it worse by forcing them to add on a penalty for failing to file.
Could a Tax Lien Result in Criminal Prosecution?
Take note that a tax lien does not directly translate into a criminal offense. Before this can happen, the IRS must redirect the matter to its internal criminal investigation department, and this is the type of escalation that only happens when there’s ample reason to suspect that the business owner evaded their taxes on purpose.
A failure to pay taxes is not the same as a criminal offense. Of course, neglecting to pay your taxes can become a crime, but it all depends on your intent. Here are a few examples of fraudulent activities that suggest a deliberate attempt to cheat the government:
- Filing an inaccurate tax return
- Concealing sources of income
- Claiming false deductions
- Making cash transactions and not presenting the receipts
- Generating phony invoices to justify unearned deductions
A business or an individual can be subject to criminal charges if the IRS can prove that they deliberately failed to pay their taxes. Although it’s a business owner’s responsibility to understand the applicable tax laws, some of them fail to pay their taxes out of ignorance and not from criminal intent.
Yes, even business owners make mistakes. That’s why it’s a good idea to change any practice that might even have the appearance of a deliberate attempt to defraud the IRS.
How Can I Steer Clear of a Tax Lien or Being Prosecuted for a Tax Crime?
Business owners should start to make use of every tool available to them the moment they start having money troubles. In other words, a business owner has to look for signs of financial trouble and take constructive action if any appear.
For example, if you discover that cash flow is becoming a problem, come up with a plan to file your quarterly returns and make your deposits in a timely fashion. IRS auditors will check your financial statements to find out if you paid for other commitments while you were failing to pay your tax debt.
Drastically reducing expenses or shutting down part of your operations would be hard for any business owner. However, these are both measures that could keep you from having to pay exorbitant sums to the IRS later.
If you’ve made every effort possible and still find that you can’t afford to pay your tax debt, you still have to file your return. If you’re not going to pay the debt immediately, get in touch with the IRS as soon as possible and try to come up with an appropriate payment plan.
If your case is already beyond this point and you’ve received notice of a tax lien, you still have the right to appeal. The website of the IRS Office of Appeals claims that they’ve worked with over a hundred thousand taxpayers to settle their tax issues without ever going to court.
How Do I Resolve a Tax Lien?
If a tax lien is placed on your company’s assets, you should deal with it immediately. Otherwise, you can expect the worst to happen. You could face fines, seizures of funds, and the auctioning off of company assets. Fortunately, this only happens if you fail to make some kind of arrangement with the IRS to pay off the debt.
It’s also important to understand that if your other creditors suspect a tax lien, they might demand immediate payment or stop dealing with your business altogether. Needless to say, this is not a situation you want hanging over your business.
The simplest way to resolve a tax lien is to pay the entire amount of the debt. If you’re simply not in a position to do this, you still have other options. Various options for resolving a tax lien can be found by visiting the relevant page of the Internal Revenue Service website. Even in cases where you don’t have the means to pay the debt immediately, there are still ways to resolve your tax lien.
The most important thing is to stay in contact with the IRS and respond whenever they communicate with you. One of the worst mistakes you can make is to ignore notices from the IRS and refuse to cooperate with the people who represent it. It also helps to find an attorney who is well versed in U.S. tax laws-- just in case the matter ends up in court. Before that, it’s best to work closely with an expert tax advisor to resolve the tax lien.
About C&C CPA Services
Rosangely is the President and co-founder of C&C CPA Services PA, with over 10 years’ experience in the industry and a specialty in small business accounting and tax services. If you have any questions in the area of finance, accounting or tax Rosangely will be more than happy to help!