When you owe a tax balance, what should be paid first?

Oct 20, 2014Opinions0 comments

A question I hear very often from people that have back tax balances is, “What balances should I take care of first?”  Many individuals and business owners have upcoming tax expenses that are due, but spend a lot of their time focusing on paying back tax debts first.

When you owe a tax balance, what should be paid first

The logic makes sense in that you want to make sure the debt is addressed, and most think that it looks good when payments are being made on the back end.  This way, the taxing agency knows you’re trying to get it paid, right?

While it is true that the taxing agencies do want to see the debt being addressed, the most important thing that any taxpayer can do is to make sure they are staying current on ongoing tax payments.  For example, for most business owners that have employees, the 3rd Quarter 2014 Employee Withholding Tax Return is due to be filed at the end of October.  If you are trying to decide between paying your upcoming 3rd Quarter return, or paying a previous balance that is past due, pay your 3rd Quarter return first.  This is important for several reasons.

First, this shows the taxing agency you are working with that you can keep current with your ongoing taxes.  This is a requirement anytime you are trying to work with an agency on a payment plan for your back taxes; they need to see that your balance isn’t going to continue growing.  Most often, if new tax balances are continuing to accrue, the taxing agency will not want to continue working with you on back tax balances.  Look at it from their perspective: if they see a business that consistently accrues new tax balances, why would they want to let the business continue to operate and get further and further in debt?  Sure, you might be making payments on the back end, but the balance isn’t getting any smaller because new balances continue to arise.  In many of these cases, the Internal Revenue Service or State will find a way to “stop the bleeding” and use more forceful collection techniques, such as bank account levies or even seizure of assets.  To help keep from getting to this point, it is important to make efforts to stay in compliance with your ongoing tax payments.

Second, if you are paying your current taxes, you are helping to limit future penalties.  Each time you file a return late, or pay a balance late, the Internal Revenue Service or State will tack on a penalty.  Your prior balances most likely already have many hefty penalties added.  So, it is in your best interests to avoid future penalties by making your ongoing tax payments timely.  You will help to make your past debt more manageable if you can keep future penalties from arising.

Another concern I hear when I discuss this with my clients is that the payments the taxing agency wants them to make will keep them from being able to stay current.  They wonder how they can stay current AND pay their back tax balances.  This is where consultation and budgeting comes in to play.  It is important to understand that the government wants you to stay current.  They will account for this in reviewing your financial condition to make sure that you can pay your ongoing taxes and pay your past due balance as well.  So, negotiating a payment that will help you do this is the key to getting out of past due tax debt and staying that way.

If you would like to speak with someone further about this and how this pertains to you specifically, please give us a call at 720-420-7996.  We can talk with you about your budget and ongoing tax obligations to discuss what your best plan of action is.  We want to help make sure you can continue successfully growing your business by proactively finding a resolution plan that will help you get on track and stay on track.

Amy Lee, EA
Compass Tax Group, LLC

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