Why You Should File Your Past Due Taxes (Especially If You Want a Business Loan)

Many business owners who approach my firm for bookkeeping work are also several years behind on their tax filings. Before we agree to do any ongoing bookkeeping or consulting work, our first step is to catch up their bookkeeping so their accountant can file past due taxes.

We don’t do this just because it’s good accounting. Failure to file your tax returns can lead to a number of problems. Here are just a few of the legal issues that can arise if you don’t file your past due taxes:

• You could face failure-to-file penalties. These penalties can add up fast. If you file your return more than 60 days after the due date (or the extended due date), the IRS can assess a minimum penalty of $205, or 100% of your unpaid tax, whichever is less. However, there are additional penalties the IRS can assess. The maximum late-filing penalty is 25% of the amount of tax owed, plus interest. If you are several years behind on your tax filings, this can add up to a sizable chunk of money.
  

• You might forfeit your tax refund. Many taxpayers are not overly concerned about filing their tax returns, because they are sure they have overpaid their taxes. However, I have worked with clients in the past who finally filed their tax returns, only to learn they had forfeited thousands of dollars in overpaid taxes. This is because the IRS won’t let you claim a refund indefinitely. Generally speaking, after three years, the IRS will consider your overpaid taxes a “contribution” to the United States Treasury and refuse to issue the refund.
  

• Your passport could be revoked. If you have not filed for a number of years, or if you owe more than $50,000 in back taxes and are not paying off the amount due to an installment agreement or under an Offer in Compromise, the Secretary of State could revoke your passport.
  

• You could go to jail. This is the most extreme situation, and it doesn’t happen as often as news programs and crime dramas lead us to believe. However, repeatedly ignoring notices from the IRS could ultimately lead to your arrest and imprisonment for tax evasion.

These are a few of the legal issues you could face if you don’t file your tax returns. Most of these probably come as no surprise. But did you know there could be financial ramifications if you fail to file past due taxes? In particular, failing to file your past due taxes could disqualify you from getting a personal or business loan.

What do my past due tax returns have to do with my business loan application?

Most lenders require at least your most recent tax return in order to process a business loan application. Some require several years’ worth of tax returns. There are several reasons for this:

• Verification of income. Some business owners might be tempted to inflate their income numbers in order to qualify for a loan. However, the opposite is true when they are filing their tax returns. Potential lenders will use your business’ tax returns to verify the income you are reporting on your loan application.

• Profitability trends. Especially if you are applying for a long-term loan, lenders want to see a history of profitability. This is why many lenders will ask for three years’ worth of tax returns. Having a history of profitability increases your chances of getting the loan you need at a good rate.

• Responsibility and trustworthiness. While filing your tax returns and paying your taxes on time has no direct bearing on your credit score, failing to file past due taxes can indicate a lack of responsibility and trustworthiness. These two things could negatively impact a lender’s decision regarding your loan.

Can’t my lender use my financial statements instead?

True, your lender will probably want to review your company’s financial statements, but this does not preclude your requirement to provide tax returns with your loan application.

Depending on your business structure, your tax return might also include a balance sheet in addition to your income and losses. This applies specifically to partnerships and corporations. One of the first things my firm does when taking on a new client is to compare the balance sheet on the last completed tax return to the balance sheet in the accounting software. Often, we see significant differences between the two.

In the case of sole proprietorships, which file a Schedule C, we look for a depreciation schedule. This schedule lists the depreciable assets owned by the business.

Your tax return does not take the place of a carefully kept set of books, but it is usually the “final word” on the assets and liabilities in a company. Not all business owners work with a bookkeeper who enters the tax preparer’s adjustments into the bookkeeping software. Your lender will be aware of this, and they will want to examine your tax return so that they can get a complete picture of your business’ assets and liabilities.

My business tax returns are current, but I am several years behind on my personal returns. Will this be a problem?

My firm has worked with business owners who are impeccable with their business finances, but their personal finances are much less organized. These well-meaning business owners think as long as their business affairs are in order, they can let their personal tax returns slide. This might be a huge mistake, however.

Depending on the type of loan desired, as well as the entity structure of the business applying for the loan, many lenders will want to take a closer look at the personal finances of any shareholder who owns more than 20% of the stock in the business. The lender might even require a personal guarantee of the loan, meaning if the business defaults, the owners or shareholders could be on the hook for repaying the loan.

Just as your lender will likely request your business tax returns so they can make a decision about the business’ ability to repay the loan, they’ll also likely want to see your personal tax returns to determine if you will be a viable guarantor of the loan. For this reason, you should file your personal past due tax returns before applying for a business loan. If you are in business with a partner, encourage your partner to file their tax returns prior to applying for a loan, too.

Past due taxes do not have to derail your plans for your business.

Typically, a business owner does not file their tax returns for one of two reasons. Either they are overwhelmed by the amount of work required to file the returns, or they are afraid they won’t be able to pay the amount of tax they owe.

Working with a qualified accountant or bookkeeper throughout the year can help you overcome both the overwhelm and the fear. A good accountant or bookkeeper will make sure your records are in order so tax time is a breeze. At the same time, they will help guide you regarding the amount of your income you should be reserving in a savings account to cover any taxes you will owe at the end of the year. Finally, many accountants and bookkeepers will help business owners complete loan applications, making even that process less daunting.

Past due taxes can derail your plans for your business if not addressed. If you have not filed your tax returns for several years, make it a priority to file as soon as possible, especially if you are considering applying for a business loan at some point in the future. Taking care of your past due tax returns now will save you the stress of having to deal with them when you really need a loan.

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