Regardless of the size of your business, you need to pay sales tax to avoid any of these potential risks.
In this article:
- IRS Audit
- Interest Charges
- Additional Late Fees or Penalties
- Tax Law Confusion
- Legal Repercussions
- Limited Business Growth
- Potential Roadblocks Should You Consider to Sell Your Business in the Future
Consequences Business Owners May Face If They Do Not Pay Sales Tax
1. IRS Audit
A tax audit is not a risk per se. This process is done by the agency to ensure tax compliance.
If your business is compliant to the tax rules imposed by the IRS, being subjected to an audit should be no cause for concern. However, if you have chronically neglected to pay sales tax, whether intentionally or inadvertently, the process could prove rather, well, taxing.
The IRS monitors whether a business is still in operation through filed sales tax returns. A business, regardless of size, selling taxable products, should file periodic sales tax returns and remit sales tax.
Missing returns is considered a red flag. These discrepancies will prompt the IRS to conduct a tax audit.
Aside from missing returns, the IRS uses the following systems when determining which taxpayers to audit:
- The Information Returns Processing System (IRP) – records information from entities required to submit tax information, such as banks and employers.
- The Discriminant Function System (DIF) – a system that measures the statistical accuracy of a filed tax return based on previous IRS data.
- The Unreported Income Discriminant Function (UIDF) – probes into a tax report’s income and tax level, as measured against previous IRS data
Once selected for an audit, it is up to a taxpayer to prove to the IRS that no deliberate tax evasion has been committed by providing pertinent records.
2. Interest Charges
If a tax audit determined your business is not paying sales tax to the IRS, you will be charged with interest, among other fees. These penalties can easily put your business’s financial health in jeopardy.
The average monthly interest rate imposed by most states on overdue sales tax is 6.4%. This means that for an outstanding tax debt of $10,000, you need to pay an additional $640 for each month that your tax debt was not paid in full.
3. Additional Late Fees or Penalties
On top of interest fees, some states also charge late fees for overdue taxes.
The average late fee rate levied by states is at 17.85%. For a sales tax debt of $10,000, late fees will then amount to $1,785 per month.
These penalties do add up. No matter how good your business is going, paying these exorbitant fees will definitely take a toll on your financial statement.
Interest and late fees should be enough of an argument for utmost compliance. Keep in mind that businesses are eligible for deductions if returns are filed consistently and accurately.
Here, your choice is between collecting these tax deductions and refunds and paying late remission interests and penalties. It’s clear which option is more beneficial to your business.
4. Tax Law Confusion
Failure to consistently file your business’ sales tax returns can eventually lead to your losing track of current tax laws. Remember that the rules that govern tax compliance are subject to change.
And, for business owners, the importance of keeping abreast of these tax law changes cannot be overstated. It might just spell the difference between maintaining a business operation within lawful bounds and conducting business outside legal parameters.
Case in point: The recent changes in tax rules governing remote commerce. Previously, remote sellers were not subjected to paying sales tax across all states.
But this is quickly changing. More and more states are requiring remote sellers to collect and pay sales tax once they exceed a specific sales threshold.
Alabama and South Dakota pioneered this development. Eventually, states such as Vermont, Colorado, and Tennessee followed suit.
For the IRS, this means augmented tax collection. For remote sellers, this means they will now have to register with the IRS in order to collect and remit sales tax.
Now, they too will be subject to a penalty for not collecting sales tax. Or, for collecting sales tax without remitting them to the IRS.
Remote Seller Definition: A seller of services or products delivered into a state where the seller has no legal responsibilities, due to zero physical presence in that state.
5. Legal Repercussions
We have already discussed the penalty and interest fees required of taxpayers with overdue tax debt, but have neglected to apply for any form of tax relief. But those fees are just the tip of the iceberg.
The IRS also imposes more drastic measures to ensure tax enforcement and collection. One of these measures is placing levies on the assets and properties of delinquent taxpayers.
Assets that may be levied include funds in your business’ bank account. If need be, the IRS can also serve your place of business, and all valuable appliance and equipment therein, with a levy notice.
After chronic neglect of correspondences from the IRS, the agency can also resort to pursuing your case via a criminal court. This is most true in cases where a massive and deliberate tax fraud or evasion has been determined.
For instance, in Maine, an owner of a retail store was sent to jail for three months for failing to pay sales tax. The court found out that between 2007 and 2017, the defendant collected $370,000 in sales tax but failed to remit the amount to the IRS.
Unfortunately, such a case is not isolated. In fact, a considerable number of business owners mistakenly assume that they can get away with pocketing sales tax.
Of course, with the IRS, that’s not exactly the case.
6. Limited Business Growth
People get into business with growth in mind. No matter how small you start, your goal is to make it big in the future.
If you share that exact same sentiment, then it is in your best interest to pay sales tax diligently. Failure to do so will drastically affect your business’ chance of hitting it big.
Now, you might be selling direct via an Instagram page. But, if you plan to eventually apply for a concessionaire contract with one of the country’s major retail outlets, your business will have to be supported by sales tax returns covering the entire duration of your business’s operations.
These sales tax returns will testify to the marketability of whatever you are selling. Also, they will convey that you are in good standing with the IRS.
Remember that Walmart will not work with you if, first, they think your product will just fester in their shelves, and, second, if they think the partnership you offer might get them in trouble.
7. Potential Roadblocks Should You Consider to Sell Your Business in the Future
Consider this; you started your business at home. Your products became popular enough that they exceeded the threshold allowed by your state to be exempt from sales tax.
But even then you neglected to file and remit sales tax returns. Eventually, your business grew to a considerable size that would allow humongous profit should you decide to sell.
You decide to sell. Unfortunately, no buyer will assume responsibility of sales tax you failed to pay.
To push through with your plans, you will have to pay the sales tax you owe the IRS. This roadblock would not have happened if you exercised total compliance from the get-go.
Tax compliance will always be the smart choice for any type of business. Given how there’s no getting around the obligation to pay sales tax, business owners might as well religiously abide by the law and reap the rewards of doing so.
Are you a business owner with helpful tips and insights you wish to share? Please sound off in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.