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Tax Debt Restructuring Strategies For Struggling Small Businesses

Tax Debt Restructuring Strategies For Struggling Small Businesses

Dealing with tax debt can be an incredibly stressful and challenging situation for any small business owner. If unpaid taxes have piled up, penalties and interest may be accruing, and you likely feel overwhelmed trying to get your finances back on track. The good news is that you have options when it comes to restructuring tax debt and getting relief. This article outlines key strategies that struggling small business owners can utilize to resolve IRS tax debts and regain their financial footing.

Explore IRS Payment Plans

One of the most common and accessible options for managing tax debts is enrolling in an IRS payment plan. These plans allow you to pay off your balance over an extended timeframe, often with reduced penalties and interest. Some plans to consider:

  • Installment Agreements: An installment agreement allows you to pay your full tax debt in smaller, more manageable payments over time – typically over 3-6 years. You’ll still owe interest and penalties but usually at reduced rates.
  • Partial Payment Installment Agreements: If you can’t afford an installment plan to pay your full debt, this option allows you to pay whatever is realistic for you monthly. You won’t get penalized further as long as you stick to the agreed payment schedule.
  • Delayed Collection: If you have short-term cash flow issues or are waiting on funds from an investor or sale, you can apply for delayed collections to pause payments for 1-2 years. Interest and penalties continue accruing.

The key advantage of IRS payment plans is that the collections process pauses, protecting your assets. The downside is that penalties and interest continue growing throughout the payment term.

Request an Offer in Compromise

If you have very limited income and assets and likely can’t pay your full tax debt within the collections statute of limitations, submitting an offer in compromise could wipe out most of your tax debt permanently. This involves filing detailed financial forms with the IRS and proposing a reduced lump-sum settlement amount as payment in full based on what you can afford. Generally, the IRS will accept an offer if it’s convinced you couldn’t pay your full debt in less than 10 years anyway.

It’s worth consulting a tax professional to develop your offer strategy and determine an appropriate settlement amount. Be prepared to make your case with thorough documentation of your finances. If approved, you get a clean slate and restart with no tax debt!

Seek Tax Debt Relief Through Bankruptcy

Though bankruptcy generally can’t eliminate tax debts, it can provide important relief and protections for struggling small businesses. Under Chapter 7 bankruptcy, qualifying business debts are wiped out entirely through liquidation. Unpaid taxes generally can’t be discharged but all IRS collection activity must freeze when you file, providing critical temporary relief.

Chapter 11 bankruptcy allows more flexibility for restructuring and negotiating tax debts. While still difficult to fully discharge, the court can reduce interest rates and create manageable payment plans. Chapter 13 bankruptcy is also an option for small business owners operating as sole proprietors. Consult a small business bankruptcy attorney to assess whether bankruptcy could help resolve IRS tax debts for your situation.

Request Penalty Abatement

If tax penalties are contributing significantly to your overall tax debt, requesting abatement of IRS penalties could provide major relief. The IRS is surprisingly amenable to waiving penalties for “reasonable cause” – essentially meaning you made an effort to comply but extenuating circumstances interfered.

Examples of reasonable cause include:

  • Death or serious illnesses in the family
  • Destruction of records due to natural disasters
  • Reliance on incorrect tax guidance from IRS agents

Drafting a persuasive penalty abatement request is key. Outline your circumstances, efforts to comply, and plans to remain compliant going forward. Providing evidence to support your claims is also important. If approved, the related penalties will be waived, deducted from your balance.

Explore Tax Debt Resolution Firms

If you are still struggling to resolve tax debts on your own, partnering with a tax debt resolution firm may be a smart next step. These firms employ ex-IRS agents and tax attorneys to audit your situation and utilize their experience negotiating directly with the IRS on your behalf. Though most charge fees and commissions, for difficult large-dollar cases they can often achieve results not readily accessible to taxpayers alone.

Ask about the firm’s approach, services, costs, and success rates with cases similar to yours. Look for firms that offer free consultations and personalized plans. Read reviews and complaints with oversight organizations to validate credibility. While expensive, hiring expertise could save you money in the long run.

Don’t Delay – Take Action Today

The worst thing struggling small business owners can do is ignore tax debts and delay taking action. Interest and penalties rapidly compound, new IRS notices continue arriving causing stress, and before you know it years have passed without resolution. Additionally, the older debts become, the fewer options remain.

Instead, make resolving tax debts a top priority. Consider meeting with both a tax professional and small business bankruptcy attorney to discuss the full range of relief options available. Educate yourself on the pros and cons of each approach. Then, based on their guidance and your own analysis, take decisive action on the tax resolution strategy that makes the most sense for your situation.

The sooner you can stop collections and establish an affordable payment plan or settlement with the IRS, the faster you can move forward with running your business again. With a proactive approach and determination, struggling small business owners can eliminate tax debts in a reasonable timeframe and without liquidating the business. But you have to be willing to take the first step. Evaluate your options today – and don’t let past tax mistakes continue hindering your small business’s future success.


IRS Payment Plans Overview

Offer in Compromise Program Details

Using Bankruptcy for Tax Relief

Reasonable Cause for Penalty Abatement

Selecting a Tax Debt Resolution Firm

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