My business can't pay its taxes!June 17, 2008: 10:39 AM ET
Ask FSB's experts advise an independent securities trader who lost his shirt and now can't afford to pay capital gains.
Wyatt, New York City
I am a trader, incorporated and with S-corporation status. I had $1 million in short-term capital gains for the year ended Dec. 31, 2007. I lost it all and don't have the money to pay taxes. Can I change the tax year? What are my options?
By Julie Freese, Fortune Small Business contributor
Dear Wyatt: Realizing that your business can't afford to pay its taxes can cause anxiety, but there are steps you can take to fix the situation.
Regardless of your ability to pay, send your tax return documents in on time to avoid penalties for failure to file. You cannot apply for an installment agreement with the IRS until your paperwork has been received, says Ronald J. Cappuccio, counselor at law.
Failure to file will lead to expensive penalties of anywhere from 5% to 25% a month.
Unfortunately, changing the tax year is not an option for you. As an S-corporation filer, you can't change the term once you've been established as a calendar-year taxpayer, says Mark Nash, a partner in the private company services practice at Pricewaterhouse Coopers.
As a trader, your gains and losses are generally treated as capital. You can make an election under Section 475(f) of the Internal Revenue Code to mark your securities to market every year. This will allow you to treat your gains and losses as ordinary, says Nash. Ordinary losses are not subject to the normal capital-loss limitations.
You need to make that election by the due date of your tax return for the year prior to the date you want it to take effect. Since you've missed this date, you cannot make the election this year, meaning your losses won't be treated as ordinary and cannot be carried back, says Nash.
The IRS will ask you to fill out Form 433B, a Collection Information Statement. You will be asked to list your income and expenses. It is important to hire a tax attorney who will approach the form as an advocacy document, says Cappucio.
After you file the necessary paperwork, if you are able to secure a loan from your bank, do so. However, keep in mind that your inability to pay the IRS will affect your FICO score, making it more difficult to obtain bank credit, says Cappuccio.
If a bank loan is out of reach, you can apply for an installment agreement with the IRS, which will pay off your entire taxes plus penalties and interest over a period time, says William Perez of Perez Tax Associates. To begin this process, you need to fill out IRS Form 9465. Visit the IRS Web site for more specific information and requirements.
If you are unable to pay installments, consider applying for a compromise agreement with the IRS. This agreement allows you to pay off your debt for a lesser portion of the total amount owed. While this option may be better for your current circumstances, keep in mind that the program is difficult to qualify for, says Perez. The paperwork requirements are also fairly onerous.
For more information about the compromise application process and forms needed, visit the IRS Web site.
Legally, while you can submit an offer in compromise, the IRS isn't likely to accept it for an ongoing business, especially if you have assets that could be liquidated, says Cappuccio.
Disclaimer: This column provides general information only and is not intended to replace the services or legal advice of an attorney or CPA. Always consult a lawyer or accountant regarding specific legal or financial issues.
Give us your advice: Check out recent "Ask & Answer" questions.