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Stop a Tax Lien: Bakersfield Small Business Back Taxes, Act Now

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If your small business owes back taxes, file the missing returns now, get an IRS account transcript, and contact the IRS to arrange a payment plan or hire representation. Waiting only adds penalties and interest to the balance and increases the chance of a levy or lien. If payroll deposits are involved, move faster since the IRS treats those debts differently.

TL;DR:

  • Filing accurate past-due returns and requesting account transcripts quickly helps prevent penalties and reduces the risk of enforced collection actions.
  • Resolving federal back taxes with an installment agreement, offer in compromise, or penalty relief depends on a truthful assessment of the business’s current cash flow and compliance status.
  • Employers must stop missed payroll deposits immediately and avoid using withheld taxes for operational expenses to prevent personal liability under the Trust Fund Recovery Penalty.
  • State and local back taxes require separate resolution efforts and can lead to fast-moving liens or levies, even if federal taxes are already addressed.
  • Addressing back taxes early with proper bookkeeping and professional IRS representation minimizes long-term damage to credit, operational stability, and future financing opportunities.
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Table of Contents

What back taxes are and how they typically arise for small businesses

Back taxes are any tax debt you owe the IRS from a prior period that was never paid in full, whether or not a return was filed. For a small business, this usually starts small: a missed quarterly deposit, a return filed late during a busy season, or a bookkeeping error that understates income. Left alone, the balance compounds with penalties and interest until it becomes a real threat to the business.

Most business back-tax cases fall into a few categories:

  • Unfiled income tax returns for the business entity (Form 1120, 1120-S, or Schedule C with a personal return).
  • Unpaid payroll withholding, the money taken from employee paychecks for federal income tax, Social Security, and Medicare.
  • Employer payroll tax obligations, the employer’s own matching share of Social Security and Medicare.
  • Sales or excise tax liabilities where applicable, which are state-administered but often surface alongside federal issues.

A common pattern: a business owner reconciles bank deposits as revenue without separating sales tax collected, or misses a 941 filing during a cash crunch and assumes it can be caught up “next quarter.” Both create exposure that grows quietly until a notice arrives.

Penalties, interest, and the IRS collection timeline (what makes the debt grow)

The dollar amount you owed originally is rarely the number you see months later. Penalties stack, interest compounds daily, and the IRS has a defined window to collect.

  • Failure-to-file penalty: generally 5% of unpaid tax per month, up to a 25% cap, with a minimum penalty for returns filed more than 60 days late.
  • Failure-to-pay penalty: generally 0.5% per month, and when both penalties apply in the same month, the failure-to-file rate is reduced by the failure-to-pay amount.
  • Failure-to-deposit penalty (payroll): tiered from 2% to 15% depending on how many days late the deposit is, with the top tier applying if it is not paid within ten days of the first delinquency notice.

The IRS generally has a 10-year period from assessment to collect a tax debt, known as the Collection Statute Expiration Date (CSED). Certain events, including bankruptcy filings and some installment agreement requests, can suspend or extend that period, so the clock is not always running even when it looks like it should be.

Once a balance ages without a response, the IRS moves through a predictable sequence: notices, then a Notice of Federal Tax Lien, then levy action on bank accounts or receivables, and in more serious cases a revenue officer assigned to the account. Unfiled returns can also trigger a Substitute for Return, an IRS-prepared return that typically ignores deductions your business is entitled to.

How to determine exactly what you owe (practical steps and documents)

Guessing at a balance wastes time and often leads to over- or under-negotiating with the IRS. Start with the government’s own record of your account.

  1. Request your IRS account transcript by mail, phone, or through an IRS online account for businesses, which shows assessed balances, penalties, and payment history by tax period.
  2. Check the transcript for a Substitute for Return code, which signals the IRS filed on your behalf and likely overstated what you owe.
  3. Compare the assessed balance against your own bookkeeping records, bank statements, payroll reports, and prior filed returns to spot discrepancies.
  4. Pull vendor and customer records for any periods in question, since these often resolve disputes over income or deductible expenses.
  5. Call the IRS Business & Specialty Tax line at 800-829-4933, or the number listed on your specific notice, and be ready to state your EIN, the tax periods involved, and whether you are requesting a transcript, a payment plan, or clarification on a balance.

Pro Tip: Request transcripts for every open tax period at once rather than one at a time. It gives you the full picture before you commit to a payment plan you might not be able to sustain.

Resolution options: payment plans, offers in compromise, and penalty relief

Once you know the real balance, match it to the option that fits your cash flow rather than the one that sounds easiest.

  • Full payment is the cleanest option when the business has the cash, since it stops penalty and interest accrual immediately.
  • Installment agreements let a business pay over time; most require a collection information statement such as Form 433-B to document assets, income, and expenses, and an in-business trust fund installment option exists specifically for payroll liabilities.
  • Offer in Compromise (OIC) settles a debt for less than owed, but the IRS requires strict compliance first: all required returns filed and, for businesses, current federal tax deposits in recent quarters, documented through Form 656 and the related 433 series.
  • Currently Not Collectible (CNC) status pauses active collection when a business genuinely cannot pay, though the debt and interest continue to accrue in the background.
  • Penalty abatement can reduce or remove penalties under reasonable cause or a first-time abatement request, though the underlying tax and interest generally remain due.

Whichever route you pursue, staying current on new tax obligations while a request is under review matters. Falling behind again during negotiation is one of the fastest ways to have an offer or agreement rejected. Our guide to IRS payment plan options walks through eligibility and fees in more detail, and the basics of qualifying for an offer in compromise are worth reading before you apply.

Payroll tax risk: trust fund taxes and the Trust Fund Recovery Penalty

Payroll withholding is not the business’s money. It belongs to employees and the government the moment it is withheld, which is why the IRS treats unpaid payroll taxes with particular urgency.

  • The Trust Fund Recovery Penalty (TFRP), under IRC 6672, allows the IRS to assess the unpaid withheld amount personally against a “responsible person,” which can include an owner, officer, or anyone with authority over which bills get paid.
  • Liability is personal and survives even if the business closes or files for bankruptcy protection.
  • If deposits have been missed, stop the bleeding immediately: halt any further missed deposits, gather payroll records for every affected quarter, and get authorized representation before an investigation interview.
  • A pending TFRP investigation can complicate or delay approval of an installment agreement or offer in compromise until responsible-party questions are resolved.

Pro Tip: Never use withheld payroll taxes to cover short-term operating expenses. It feels like a bridge loan, but it is the fastest route to a personal liability that survives the business itself.

Step-by-step: preparing and filing past-due returns to avoid inflated assessments

Getting accurate returns filed, even years late, is almost always better than leaving an IRS-prepared assessment standing.

  1. Reconcile your books first, prioritizing the oldest delinquent period since penalties and the collection clock are tied to when each return was originally due.
  2. File accurate returns for every open period, commonly Form 1040 or 1120 for income tax and Forms 941 or 940 for payroll, attaching explanations for unusual items.
  3. Decide whether to pay in full with the filing or apply for relief at the same time, using Form 9465 for a straightforward installment request or Form 433-F/433-B when more financial detail is required.
  4. If the IRS already filed a Substitute for Return, file the accurate version promptly. It reopens the assessment and lets you claim deductions the SFR ignored, often lowering the balance significantly.

Our business tax preparation checklist lists the documents most owners need to pull together before this step.

When to hire a tax pro and what to expect from professional IRS representation

Some situations call for a professional rather than a do-it-yourself approach: an active levy or lien, a TFRP investigation naming you as a responsible person, a large assessed balance, or an offer in compromise with complicated finances.

  • A firm preparing your case typically handles past-due return preparation, Form 433-A or 433-B, and full OIC documentation.
  • Reconciled, Xero-ready books speed up every one of those steps because the numbers a revenue officer asks for already exist instead of needing to be reconstructed.
  • An initial consultation usually starts with a review of your notices and a request for recent bank statements, payroll reports, and prior returns, shared securely rather than emailed back and forth.

Tolliver Bookkeeping and Tax handles bookkeeping and IRS representation together, so nothing gets lost between the books and the response the IRS receives.

How to handle state and local back taxes in addition to federal taxes

Federal back taxes rarely travel alone. California businesses that fall behind on federal income or payroll tax often owe the state as well, through the Franchise Tax Board for income tax or the Employment Development Department for state payroll withholding, and cities and counties may separately pursue unpaid business license fees or local sales tax obligations administered by the California Department of Tax and Fee Administration.

The state and federal systems do not automatically share resolution terms. Settling a balance with the IRS through an installment agreement or offer in compromise has no bearing on a parallel state debt, and each agency runs its own collection timeline, penalty structure, and payment plan process. A business can be in good standing federally while still facing a state lien.

The practical approach is to treat each agency as a separate case with its own transcript request, its own notices, and its own point of contact, while keeping a single master list of what is owed where. Prioritize whichever agency is closest to enforced collection, since a state levy on a bank account can hit just as hard as an IRS one and often moves faster because state timelines vary from the federal ten-year framework. If a payment plan is being negotiated with both, the combined monthly obligation needs to fit the business’s actual cash flow, not just what feels manageable at the federal level alone. Trying to resolve one while ignoring the other usually just shifts the crisis rather than ending it.

How to handle state and local back taxes in addition to federal taxes — overview diagram

Impact of back taxes on business credit and future financing options

An unresolved back-tax balance follows a business well beyond the IRS mailbox. Once a Notice of Federal Tax Lien is filed, it becomes a matter of public record that lenders, landlords, and some vendors can find during due diligence, and it can make securing a business loan, equipment financing, or even a commercial lease substantially harder.

Banks underwriting a loan typically ask directly about outstanding tax liabilities and may require a payoff or a documented resolution plan as a condition of approval. An active lien can also complicate the sale of business assets or the business itself, since a buyer’s lender will want the lien satisfied or subordinated before closing. Even without a public lien, an open back-tax balance signals cash-flow instability that shows up in a lender’s overall risk assessment.

The fastest way to limit this damage is to have a documented resolution already in place before a lender or landlord asks: proof of a current installment agreement, an accepted offer in compromise, or CNC status shows the debt is being handled rather than ignored. Waiting until financing is on the table to address a known back-tax problem almost always costs more time than addressing it early.

Tax lien and levy procedures and their impact on business operations

A federal tax lien attaches automatically to a business’s property and rights to property once a balance goes unpaid after notice and demand, but the IRS still generally files a Notice of Federal Tax Lien publicly to protect its claim and establish priority against other creditors. That public filing is often the point where a bank or supplier first learns of the debt, sometimes before the business owner has fully absorbed the size of the problem.

A levy is a separate and more immediate action: actual seizure of funds, such as a bank account sweep or a garnishment of receivables, and it can freeze operating cash without warning if notices were ignored. For a business that depends on smooth cash flow to make payroll or pay suppliers, a bank levy can be disruptive enough to threaten day-to-day operations, and a levy on accounts receivable can strain relationships with customers who suddenly receive a notice to pay the IRS directly instead of the business.

The IRS generally escalates through a sequence of notices before enforced collection, then may assign a revenue officer for more complex or high-balance cases, which usually means direct phone calls or a visit rather than only mailed notices. Responding to the earliest notices, before a lien is filed or a levy issued, is almost always the difference between a manageable negotiation and an emergency response. Once a levy hits, options narrow to releasing the levy through payment, proving hardship, or negotiating a resolution quickly, all of which take longer once the money is already gone.

Tax lien and levy procedures and their impact on business operations — overview diagram

Owners already stressed about a real back-tax balance are prime targets for scams that mimic legitimate IRS contact. The IRS does not initiate contact by phone demanding immediate payment with a gift card, wire transfer, or cryptocurrency, and it does not threaten immediate arrest over the phone. Genuine collection contact starts with mailed notices, and any legitimate phone follow-up references a notice you should already have received.

“Tax relief” companies advertising guaranteed settlements for pennies on the dollar are another common trap. An offer in compromise has strict eligibility rules tied to your actual ability to pay, verified by the IRS through documented financials, and no firm can promise a specific settlement amount before reviewing your case. Be wary of any company that asks for a large upfront fee before reviewing a single document or that pressures you to sign quickly.

A few habits protect a business from both government impersonators and predatory preparers: verify any notice by calling the number on IRS.gov rather than a number provided in an unsolicited call or letter, confirm a preparer’s credentials before handing over financial records, and never wire money or buy gift cards in response to a tax demand. If you’re unsure whether a notice is legitimate, your safest move is to request your account transcript directly and compare it against what the letter claims.

Act early: bookkeeping prevents most back-tax crises

Most back-tax cases we see started as a small, fixable gap: a missed deposit, a return pushed off during a busy month, a spreadsheet that fell behind. Reconciled books catch these before the IRS does, and filing on time avoids the inflated Substitute for Return assessments that make everything harder to unwind; professional accounting and payroll services can help maintain accurate records and timely compliance. If a notice has already arrived, don’t wait for the next one before making a call.

— Tolliver Team

How Tolliver Team helps with catch-up bookkeeping, tax prep, and IRS representation

Kern County business owners dealing with back taxes usually need three things at once: accurate books, correctly filed returns, and someone who can talk to the IRS on their behalf. Tolliver Bookkeeping and Tax handles all three under one roof, so your bookkeeping and your tax filings never disagree with each other again.

Tolliver Bookkeeping and Tax

A first call typically starts with a look at your notices and a rough sense of which periods need attention, whether that means catch-up bookkeeping, filing past-due returns, or requesting a payment plan. They handle migration to Xero at no cost, and documents move through a secure Client Hub instead of email threads. If back taxes have you facing a notice, a lien, or a payroll tax question, visit our IRS representation page to see how we can help.

This article is general information, not a substitute for advice from a qualified financial advisor. Consult a qualified financial professional about your own circumstances before acting on anything here.

Sources

FAQ

Does the IRS forgive tax debt after 10 years?

The IRS generally cannot collect a tax debt after the 10-year Collection Statute Expiration Date passes, though this is not automatic forgiveness in the way a settlement is. Certain events, like bankruptcy or some installment agreement requests, can pause that clock and push the actual expiration date later than ten years from assessment.

How far back can the IRS pursue unpaid business taxes?

There is no time limit on how far back the IRS can go for a return that was never filed, since the collection clock only starts once a tax is formally assessed. For returns that were filed, the 10-year collection period runs from the assessment date, not the original due date.

When does a small business need to start paying taxes?

A small business generally owes income tax as soon as it earns taxable profit, and payroll tax obligations begin with the first paycheck issued to an employee. There is no revenue threshold that delays these responsibilities. Filing requirements apply from the business’s first active tax period regardless of size.

What happens if a business hasn’t filed a tax return in 10 years?

The IRS may have already prepared Substitute for Returns for some of those years, which typically overstate the tax owed because they don’t include deductions. Filing accurate returns for each missing year, starting with the oldest, is the standard path to correcting the balance and reopening any inflated assessments.

Can a business settle back taxes for less than it owes?

Yes, through an Offer in Compromise, though the IRS requires strict compliance first, meaning all required returns are filed and, for a business, recent tax deposits are current. Documentation through Form 656 and the related 433 series is required, and acceptance depends on a documented ability to pay, not a flat discount rate.