As the April 15, 2024 tax filing deadline has come and gone, many entrepreneurs and small business owners are left grappling with back taxes. Recent challenges have compounded these problems, making now a critical moment for business leaders to act. Further delay can exacerbate financial stress and legal consequences.

The latest IRS data highlights the urgency for entrepreneurs to address their tax obligations. The IRS, using funds from the Inflation Reduction Act, has significantly increased its enforcement efforts. It wasn't until 2023 that the IRS launched one new compliance initiative targeting high-income non-filers, identifying over 125,000 cases since 2017 as part of a comprehensive effort to restore fairness to the tax system. In addition, the IRS has enhanced its audit activities, particularly for wealthy individuals and large partnerships.

Drawing from the extensive experience of our tax resolution team at Advanced Tax Solutions, here are four essential strategies for entrepreneurs to effectively resolve back taxes and prepare for productive communication with the IRS.

Related: Top 10 Ways to Avoid an IRS or State Audit

1. Understand the emergency and the consequences

Ignoring tax issues can lead to serious consequences. The IRS can impose severe punishmentsincluding a 5% monthly late filing penalty for the first five months, which quickly increases to 25%. After that, there is an additional penalty of 0.5% per month, plus interest on the debt taxes, penalties and accrued interest. In extreme cases, the IRS may file a substitute return on your behalf, which often ignores deductions and leads to the highest possible tax liability.

The increase in the IRS enforcement budget underscores the urgency. Relying on the new IRA funding, The White House has budgeted to increase the IRS's annual enforcement budget nearly fourfold over the next decade, to $19.5 billion, and the agency has announced multiple multiyear efforts in several key areas to increase collections.

2. Collect and organize financial data

Before contacting the IRS, make sure all financial records are neatly organized, including income statements, expense receipts and previous tax returns. A comprehensive and organized filing will make communication with the IRS smoother and demonstrate your commitment to resolving the issue.

Use digital tools and accounting software like Sage, Oracle and Xero to keep track of your financial data throughout the year. These tools can help generate detailed reports that are easy to share with your tax professional or the IRS. According to Fortune Business Insights. This trend shows how vital these tools have become for effective financial management.

Related: Finally, tax season is over. Or is it? Here are 5 things you should do year-round to reduce tax season stress.

3. Seek professional help

Navigating tax regulations can be daunting, especially with complex tax matters. Employment a Certified Public Accountant (CPA) or a Certified Tax Resolution Specialist (CTRS) can be invaluable. These professionals have the expertise to negotiate with the IRS on your behalf, potentially reducing your tax liability and penalties. They can also provide invaluable guidance on organizing your financial records and ensuring all documentation is accurate and complete, preventing future tax issues.

I have seen many entrepreneurs significantly reduce their tax burden by using professional help. Understanding the nuances of tax law and having someone who can communicate effectively with the IRS can make all the difference. Even with a master's degree in Taxation and 30 years of experience, there are some returns that come up in my office that I either have to collaborate with other professionals or even refer to another professional who specializes in that particular client's industry . Understanding your limits is a key to empowerment. Taking on a really difficult case may require professional help because making a mistake can be quite costly IRS Penalties and interest.

That said, unless you have something unusual or confusing, many tax returns are achievable to prepare yourself, especially with the help of tax preparation software. I would not recommend preparing a tax return with just pen and paper, even if it is simple. Sadly, the complexity of the tax system has gotten progressively worse over the years and there is no end in sight.

4. Communicate effectively with the IRS

On May 2, 2024, the IRS released an update to it Strategic Operation Planwhich describes the implementation of the Inflation Reduction Act (IRA). This update details the IRS's plan to nearly triple audit rates for large corporations with assets over $250 million, rising from 8.8% in 2019 to 22.6% by 2026. Additionally, audits in large and complex partnerships will increase to 1% from one-tenth of one percent. With these changes on the horizon, it's never been more important to stay vigilant and ensure your financial records are accurately maintained so you're fully prepared for increased scrutiny.

When you're ready to contact the IRS, preparation is essential. Start by looking for your tax transcript to get a clear picture of what the IRS knows about your financial situation. Be honest and sincere in your communication. Explain the reasons for your taxes, whether due to economic hardship, oversight or other factors. The IRS is more likely to work with you if they see a genuine effort to solve the problem.

Related: 5 Causes of Small Business Tax Audits and What to Do If the IRS Comes Calling

By taking these steps, entrepreneurs can transform their delayed tax issues into a manageable process, paving the way for financial stability and peace of mind. Remember, the key is to act now and seek the right help to overcome these challenges.