The idea of paying taxes late and incurring IRS interest charges elicits a stern "Don't do that!" from many tax professionals. Yet some business owners decide that it's cheaper and more convenient than taking out a loan. So those with short-term cash management issues or personal expenditures like college tuition may make a strategic decision to pay the government late.
Trey Taylor's employee benefits consulting firm was debt-free last year, and he wanted to keep it that way. But 2016 was the first year Taylor was required to provide health insurance for his staffers under the federal overhaul, and he wasn't sure how premium costs would affect his cash flow. Rather than deal with the hassle and expense of applying for a line of credit, he decided not to pay his entire 2015 tax bill in the spring and hold back $3,200 that Taylor Insurance Services owed the IRS. He had calculated that it was cheaper to pay any penalties and interest to the government.
"It allowed us to keep enough cash on hand to meet near-term expenses," Taylor says.
A strategy of paying taxes late rather than when they're due is contrarian — the government frowns on late payments, and penalizes procrastinators. While some companies can justify paying late because of unusual events like the one Taylor dealt with, tax professionals advise business owners not to take such a step lightly, and to consult an expert well before the deadline for filing their income tax returns.
Certified public accountant Leon Dutkiewicz looks at intentional late payments as a one-shot deal, and something to be done only if a business is certain it has money coming in fairly soon after its filing deadline.
"My view is it's a strategic choice, generally for somebody in business or starting a business or looking at a life event like college tuition, buying a home, things of that nature," says Dutkiewicz, a partner with D&H Global Tax Group in Philadelphia.
And paying late isn't for a business that's struggling financially — putting off a tax payment while you hope you'll be able to bring in more revenue is a danger sign. For companies in a bind, a better solution is talking to the IRS about alternatives including installment payment plans — but you won't be able to do that if you've piled up unpaid taxes.
Businesses that want to pay late must still either file a return on time or get an extension of the filing deadline. The failure-to-file penalty is 5 percent of the unpaid taxes for each month or part of a month that the return is late, up to a maximum of 25 percent. There is interest of 4 percent on the unpaid tax, an amount linked to the federal short-term interest rates and set each quarter. The late payment penalty is milder at half a percent per month or part of a month in addition to the interest charges. But beware — interest paid to the IRS is not a tax deduction, unlike the interest paid on a bank loan.
Taylor, who had gotten an extension, paid the balance of his company's tax bill in October. As it turned out, he didn't owe the government anything for the late payment. Under the tax law, if a company or individual pays at least 90 percent of the amount of tax they paid in the previous year, there's no added cost on the balance due the government.
Bill Seavey chooses to pay late because the spring is one of the busiest seasons at his bed and breakfast in Cambria, California, and he can't focus on tax preparation.
"It seems like I can never get the taxes done even with the assistance of my preparer at that time of the year," says Seavey, owner of Her Castle. "I have more time in the fall."
Seavey paid about $70 in penalties and interest this year, an amount he considers part of the cost of doing business.
"The interest payments aren't very severe and this is a factor," Seavey says.
Nate Smith, a director in the national tax office at CBIZ MHM, an accounting firm based in New York, warns that there can be consequences besides penalties and interest. The IRS can put a lien on assets and freeze bank accounts.
"Ordinarily, you would not want to play that game unless you have an extraordinary circumstance," he says.
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