First Person: I Sold My Business ... And the IRS Said What?

I had a horrible experience with the IRS and can still remember the overwhelming feeling of helplessness when I realized the situation I had put myself and my family in.

The whole saga started very positively. At one time I owned a small greeting card company. As an artist with a good sense of humor, I started by drawing cartoons and adding funny captions. I would print them up and sell them to friends and family. Eventually demand increased and some distributors contacted me with large orders.

I built the business up to a few employees and our own in-house production and printing operation. We had many customers, both locally, nationally and around the world. We also licensed our designs and captions for other companies to print and use. Our cards and humor were sexy and adult-oriented and we captured a great segment of the market not yet being addressed by the major corporate greeting card companies.

After a few years of success in business, we were approached by one of those large corporate greeting card companies. First they began buying our designs so they could start their own similar lines and eventually the relationship developed to us designing cards for them. After that went well, they approached us about buying us outright, so they could simply make our brand one of their greeting card lines.

The offer was quite generous and included stock I could offer my employees, as they would be out of their jobs. It included stock for me and a large lump sum payment, an amount equal to more than what it would have taken me to earn in more than five years.

After consulting my family, I accepted and thought all my problems would be solved. We spent. a large portion of the money on buying our home, as well as two cars and paying off some debt. We invested in our retirement and saved the rest.

About nine months later after meeting with our accountant, we were shocked to learned the amount in taxes we owed, having wrongly thought the house purchase was a tax deduction.

Because we had not planned properly and now that it was already the next year, we were faced with a huge tax bill and it was too late to make changes or move the money around. Something that started as a wonderful, positive opportunity had become a horrible one.

We received a demand letter from the IRS and had we not responded, would have audited. We consulted our accountant, got things in order and went in and met with the IRS to work out a plan. We had no choice, we had to pay the bill and consider it stupid tax. We ended up selling one of our cars to make a down payment, and then taking a home equity loan to pay the balance, as it offered us better terms than the interest and penalties we would pay by making payments to the IRS.

Two pieces of key advice can be learned from my mistakes. First, consult with a tax professional before any large transaction. Had I done this, I may have structured the deal differently, in a way that would have reduced my tax liability and proved even more valuable in the long term.

Second piece of key advice is if your business involves large payments or if you sell goods or otherwise have a transaction that gives you a large payment, you need to automatically set aside about 30% of whatever revenue comes in to pay taxes. Similarly, if you are an artist and receive royalties or a large advance, the same applies, take 30% and put it aside for taxes. Consult with a tax professional to confirm what the accurate percentage is for your particular situation, as it may be higher, or lower.

A simple solution we continue to use, is to simply open a second bank account just for taxes. Whenever you receive a payment or revenue, simply divert 30% into this account. Never touch the money for anything except taxes. At the end of the year, when you figure and file your taxes, use these funds. If you estimated correctly, it should cover what is owed.

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