Over 660,000 companies closed their doors last year in America, according to the U.S. Small Business Administration. The annual turnover rate held steady at ten percent, which means that entries and exits were nearly even. Contrary to popular belief, most failed businesses do not apply for or receive bankruptcy protection. Only around ten percent of the firms that closed in 2010 filed for bankruptcy.
Another common misconception held by many business owners has to do with debt. Because most of them are forced to take out bank loans to finance their businesses, they wonder what will happen if they go under. They have reason to worry. Also known as a secured loan, a bank loan is only granted after the borrower pledges an asset as collateral. If the borrower then defaults on the loan, the bank has the legal right to seize said asset. It doesnt matter if its a car, a house, or a baseball card collection. If the asset is used as collateral, the bank can take it.
But owing money to a bank is nothing compared to owing money to the IRS. The worlds most powerful collection agency doesnt play games or pull punches. They can raid your bank accounts, garnish your wages, and seize your stuff. They can even garnish your social security checks after you retire. How about closed businesses?
The IRS grants no special dispensation to owners of failed businesses. They must pay their IRS back taxes just like everyone else. This put most of them between Scylla and Charybdis. For the purposes of our discussion, Scylla is the bank and Charybdis is the IRS. Because most failed business owners owe money to both, they must decide, and quickly, which creditor to pay first.
The IRS vs. the Bank
According to Homer, when forced to choose which sea monster to pass, Odysseus opted for Scylla and lost only a few members of his crew, instead of risking the loss of his entire ship in the whirlpool known as Charybdis. Once again, the IRS is the whirlpool. Not only are they bigger and more powerful than any bank, but they are also better at collecting debt, since that is all they do.
Former business owners who owe IRS back taxes will hear from the feared federal agency. IRS letters will start showing up in their mailboxes and messages will be left on their phones. If the debt is substantial, the IRS can even send agents to your home. At this point,
tax professionals may be your only hope.
As helpful as the internet can be, only trained tax professionals are qualified to answer tax questions. The overwrought U.S. tax code is no subject for the novice. Experienced tax advisors have seen and done it all before. No matter how large your debt or dire the outlook, they can help you negotiate a manageable settlement with the IRS. This typically includes a payment plan that will prevent the IRS from putting liens or levies on your personal possessions.
