Uncle Sam, the taxman, big brother—whatever you refer to the U.S. government as remember that those in charge are always watching. As a business owner, you need to be extra vigilant when it comes to your business operations, especially when it comes to taxes. The last thing you want is to slip up and have the IRS knocking at your door with an IRS notice, penalty, or audit. If you decide to ignore one of these notices, you can find yourself in serious trouble.
If your business is facing tax problems, don’t fret. While it’s not an ideal situation, there are plenty of ways you can right your wrongs and get on Uncle Sam’s good side. Below, we’ll go over common tax problems you may face as a business owner and the steps you should take to solve these problems.
Common tax problems
There are numerous ways you can find yourself in deep water with the IRS. From overreporting expenses to failing to file a tax return, it’s important you stay on top of your taxes to avoid problems like these. Working with a tax preparation service or investing in a tax software such as ProSeries professional tax software are great preventative measures you can take to steer clear of these issues.
However, whether you’re starting a business or have been in practice for decades, it’s important to know about common tax problems companies can face. These include:
Al Capone, Martha Stewart, O. J. Simpson—these notorious tax evaders made a name for themselves by failing to pay taxes, and unless you want to be added to this long list of infamous tax evaders, it’s best to pay the taxman every penny he deserves. Tax evasion is when a person willfully makes tax mistakes, such as failing to file a tax return or paying for something in cash and not recording it.
No matter what, all business income must be reported. This means cash transactions, barter exchanges, and card transactions. All business income must be reported on Schedule C of IRS Form 1040.
As a business owner, you’re allowed to deduct certain expenses to reduce your tax bill. However, there’s a fine line between deducting and over-deducting. Common tax deductions for businesses include travel and lodging expenses for a business trip, business use of a car, and cost of goods sold.
However, some business owners may over-report to lower their tax bill even further. For example, an owner of a company may go on a family vacation, but work a day or two remotely, and will try deducting their air travel and lodging expenses. The IRS will find this is not a legitimate business expense and will give you a penalty or fine. When it comes to deductions, make sure you keep physical receipts and create digital copies as evidence, and never mix your personal life with your business life.
Step 1: Reach out to the IRS
If you were caught in any of these sticky situations, the IRS may send you an IRS notice, IRS penalty, or conduct an IRS audit. Before you begin to panic, reach out to the IRS. After all, no one is perfect, and the IRS could have made a mistake. For example, the IRS may send a notice to you thinking you’ve underreported income when in reality, you were a victim of identity theft. By finding the root cause of your problem, you’ll be able to save yourself from trouble and avoid ending up like Jordan Belfort in The Wolf of Wall Street.
Step 2: Hire a tax professional
If you were found guilty of a tax issue, whether forgetting to report foreign income after taking your business global or writing off personal expenses as business deductions, you’ll need to hire a tax professional. A tax professional will help you understand the legal jargon in your notice and help organize all of your tax documents. An accredited tax expert will help you build a case to send to the IRS to avoid paying a hefty fine or facing jail time.
Step 3: Decide on a payment option
Your tax professional will also inform you about the various repayment options available to you. Whether you were caught in excise tax fraud or failed to file a tax return, here are popular payment options:
If you’re facing a large fine and are unable to pay it, you can negotiate with the IRS and agree to pay a lesser amount with an offer in compromise. Just make sure you have substantial evidence to prove you don’t have the means to pay the full amount.
The IRS also offers the option to repay in installments. Similar to paying off a loan, you’ll have to make monthly payments until you fully pay off your tax debt.
Pay in full:
If you have the means, you can pay off all of your tax debt and fines in full. While this option isn’t viable for most companies if they have to pay millions in back taxes, paying in full will help eliminate the burden immediately.
The bottom line
We all remember the fear and dread of facing detention while in primary school. No matter the situation, being in trouble is never fun, especially when it’s with an entity like the United States government.