Immediate priorities and a practical roadmap

If your business has back taxes, start with a clear, documented plan. In my practice helping small businesses for more than 15 years, the owners who act early and in an organized way almost always preserve cash flow and reduce long‑term costs. The high‑level priorities are: verify the debt, protect employees’ payroll taxes, stop additional collection where possible, and negotiate a manageable resolution.

1) Verify notices and confirm the balances

  • Gather every IRS and state tax notice. Don’t assume amounts are correct—clerical and reporting errors happen. Match notices to filed returns, payroll reports (Form 941 and state equivalents), and bank records.
  • Check the assessment date on federal notices. The IRS generally has a 10‑year statute of limitations to collect assessed tax (IRC §6502), but that clock starts on the date of assessment; exceptions can extend it. Confirm current collection status on IRS.gov or with a tax professional (IRS collection policies).
  • If you believe a notice is wrong, respond promptly with supporting documents. Failure to respond narrows your options.

Sources: IRS collection information; see IRS pages on Collections and Notices (IRS, current as of 2025: https://www.irs.gov/businesses/small-businesses-self-employed/collection-issues).

2) Prioritize payroll (trust fund) taxes and tax withholding

Payroll taxes—amounts withheld from employees for federal income tax and FICA—are treated as trust funds. The IRS can assess the Trust Fund Recovery Penalty (TFRP) against any “responsible person” who willfully fails to collect or remit these taxes (IRC §6672). In practice, payroll tax arrears should be your top operational priority because:

  • The IRS can pursue personal liability for responsible individuals.
  • State revenue departments often mirror federal enforcement.
  • Levies and seizures for payroll tax debts are common and fast.

If payroll taxes are delinquent, consult the IRS guidance on the Trust Fund Recovery Penalty and consider voluntary disclosure and prompt payment or negotiation to reduce exposure (https://www.irs.gov/businesses/small-businesses-self-employed/understanding-the-trust-fund-recovery-penalty).

3) Keep current and file missing returns

A frequent mistake is trying to negotiate while multiple required returns are unfiled. Most IRS resolution options require all tax returns to be filed. If you haven’t filed:

  • Prepare and file the missing returns immediately (or hire a tax preparer to do so).
  • Bring payroll deposits and employment tax returns current first, because those are highest risk.

Filing returns also helps determine the accurate tax liability and can open access to payment options like Installment Agreements or Offers in Compromise.

4) Stop the bleeding: temporary steps to limit additional enforcement

  • Open lines of communication with the IRS or state tax agency. The IRS emphasizes proactive contact; it frequently improves outcomes (IRS Installment Agreement & payment options: https://www.irs.gov/payments).
  • If you can’t pay in full, request an Installment Agreement to prevent enforced collection (levies) while you negotiate. Installment Agreements are a common, often quick remedy for manageable balances.
  • Consider applying for Currently Not Collectible (CNC) status only when you can document that collection would create undue hardship. CNC is temporary and does not erase the debt; penalties and interest continue.

5) Decide among collection resolution options

Primary federal options include: Installment Agreement, Offer in Compromise (OIC), Penalty Abatement, and CNC. Each has eligibility rules and tradeoffs.

  • Installment Agreement: Allows you to pay over time. Streamlined agreements exist for smaller balances; larger balances may require a financial statement. Visit the IRS payment agreement page for details (https://www.irs.gov/payments/online-payment-agreement-application).

  • Offer in Compromise: Lets qualified taxpayers settle for less than the full amount if full payment would cause financial hardship. OIC approvals are case‑specific and require a complete financial package. For guidance and rates of acceptance, see our detailed OIC resource and the IRS OIC page. Practical note from my experience: realistic expectations are crucial—many OICs are rejected unless documentation demonstrates limited collection potential (Offer in Compromise: Qualifying, Applying, and Pitfalls; IRS OIC: https://www.irs.gov/individuals/offer-in-compromise).

  • Additional internal reading: consider the checklist on assembling a strong financial package (Preparing a Financial Package for an Offer in Compromise).

  • Penalty Abatement: If you have a reasonable cause—serious illness, natural disaster, or reliance on a tax professional—the IRS may remove penalties (interest remains unless separately addressed). Request abatement formally and provide documentation (see IRS penalty relief guidance).

  • Bankruptcy: In limited cases, certain income tax debts may be dischargeable in bankruptcy if strict criteria are met; consult a bankruptcy attorney before proceeding.

6) Prepare a financial package and documentation

Whether you propose an Installment Agreement or an OIC, you’ll be asked for supporting financial information. Typical documents include:

  • Business profit and loss statements and balance sheets for the period in question.
  • Bank statements (business and personal).
  • Payroll records, Form 941 returns, and state payroll filings.
  • Copies of notices and assessments from IRS/state.
  • Personal financial statement for owners (monthly income and expenses).

Tip from practice: assemble records in chronological order and include a concise cover letter summarizing your business plan to return to compliance. A clear narrative makes it easier for the examiner to see your ability (or inability) to pay.

7) Negotiate payment terms and preserve cash flow

  • Propose a realistic monthly payment that you can sustain. The IRS will review your cash flow and living expenses.
  • For payroll tax arrears, prioritize current payroll deposits first and negotiate past balances separately. The IRS is usually less flexible on trust fund amounts.

8) Watch for liens and levies and respond quickly

  • If you receive a Notice of Federal Tax Lien (NFTL) or levy notice, act immediately. You can request a Collection Due Process hearing within the time windows specified on notices to appeal collection actions.
  • Removing a lien requires paying the debt, posting bond, or showing a successful challenge. Consider requesting a lien withdrawal if an installment agreement meets specific criteria.

Reference: IRS information on liens, levies, and Collection Due Process rights (https://www.irs.gov/businesses/small-businesses-self-employed/collection-issues).

9) Address state and local obligations

State revenue agencies operate separately from the IRS; they have their own rules, penalties, and potential for license suspension. Contact your state department of revenue early—many have structured payment plans and offers similar to federal options. The Small Business Administration offers guidance on managing tax issues across jurisdictions (https://www.sba.gov/business-guide/manage-your-business/pay-taxes).

10) Rebuild controls to prevent recurrence

  • Set up systems for timely federal and state payroll deposits and tax filings.
  • Use payroll providers or a reliable accountant to avoid misclassification (independent contractor vs employee) and calculation errors.
  • Budget for quarterly estimated taxes if the business is pass‑through taxed or owners receive significant draws.

Common mistakes and practical warnings

  • Waiting until enforced collection starts. Early negotiation preserves options.
  • Underestimating payroll trust fund exposure. Responsible persons can face personal liability.
  • Submitting an incomplete OIC or financial package. Incomplete submissions are commonly rejected; use checklists and, if needed, a professional to assemble the package (Preparing a Financial Package for an Offer in Compromise).

When to bring in a professional

If you face payroll trust fund issues, a Notice of Federal Tax Lien, an imminent levy, or a complex Offer in Compromise, engage a qualified CPA, enrolled agent (EA), or tax attorney. In my experience, a timely professional intervention—especially one familiar with IRS collections—both speeds resolution and reduces the chance of personal tax liability.

Quick checklist to get started (first 30 days)

  • Gather all tax notices and match to returns.
  • File any missing returns immediately.
  • Prioritize and make current payroll deposits.
  • Call the IRS or state agency to enter into dialogue.
  • Prepare a first‑pass cash‑flow worksheet and a proposed monthly payment.
  • If needed, hire a tax professional experienced in collections.

Final notes and disclaimers

This guide is educational and meant to help small business owners prioritize actions when facing back taxes. It is not a substitute for personalized tax or legal advice. Tax rules and collection procedures change; verify current processes and forms on IRS.gov and with your state tax agency (IRS: https://www.irs.gov; SBA: https://www.sba.gov).

For more on specific negotiation strategies, see our detailed guidance on Offers in Compromise and when to choose installment agreements:

If you want, I can help prepare a prioritized action checklist tailored to your business size and type—sharing recent tax notices and basic cash‑flow figures is usually enough to produce a focused plan.

Authoritative sources cited in body: IRS pages on Collections, Trust Fund Recovery Penalty, Offers in Compromise, and Installment Agreements; Small Business Administration guidance on paying taxes.