Getting audited is every taxpayer’s worst nightmare. Fortunately, most people don’t get audited. However, there are a host of other tax problems that the self-employed and other small businesses do encounter. Here are three common tax errors and how to solve them.
Missing tax deadlines
Most consumers think of April 15 as the tax filing deadline. But business owners often have additional tax deadlines to keep in mind. Depending on the nature of your business, you may have to stay on top of quarterly estimated income tax payment deadlines, your corporate income tax filing deadline, state sales tax filing deadlines, employment tax filings and possibly others. Missing any of the required deadlines – even by as little as a day – can result in fines.
To stay on top of all the deadlines, have your accountant give you a list of the deadlines you’ll need to comply with. Then, set your calendar or accounting software to remind you of the due dates far enough ahead so you can gather the records you need to file the forms on time. If you have employees, a payroll service can handle the tax filings and remittance of payments for you so you don’t forget or miss filing dates.
Not setting aside money to pay taxes
When you build a profitable business, it’s natural to want to enjoy some of the profits you’ve worked so hard to earn. But forgetting to calculate the income and any self-employment taxes you’ll owe on those profits can lead to a big, unexpected tax bill when you file your personal tax return. In fact, the tax bill could be so big that you don’t have the cash on hand to pay it.
If this happens to you, don’t panic. The IRS isn’t going to come kick in your door and take away your house because you goofed this one time. But do file the tax return on time, even if you can’t pay.
Here’s why: The IRS not only wants the money it’s owed, but also wants tax returns filed on time. If you don’t file your return on time, the IRS will charge you a penalty of 5 percent of the unpaid taxes for each month or part of a month that a tax return is late up to a maximum of 25% of the taxes due. The penalty starts accruing the day after your return is due.
The simple way to avoid that huge fine is to file your tax return on time. Pay as much of the money you owe as you can when you file. The IRS will let you set up a payment plan to remit the rest of the money. The failure to pay penalty is ½ to 1 percent of the unpaid taxes, so the more you can pay when you file the return, the less the penalty will be.
Poor record keeping
If you’ve haven’t been good about keeping your business income and expense records organized you may not be able to gather all the records (or get them on time to your accountant) to complete your return on time.
If this happens, you can avoid that late filing penalty by requesting an automatic tax-filing extension from the IRS. The extension only applies to the filing date; it is not an extension of the time to pay. So, when you file for an extension, you should estimate and pay the amount of tax you think you will owe to minimize late payment penalties.
To avoid the problem in the future, keep timely and accurate records of your business income and expenses. An easy way to do that is to use ZenBusiness Money to handle invoicing and track income and expenses.
Receiving a notice from the IRS
To be clear, a notice from the IRS is very different from being audited. It’s easy to panic if you receive a mailed letter from the IRS, but it may be a relatively minor issue. The IRS may have found you made an error and that you owe them more money. If the amount is minor, the easiest way to handle it is to pay what’s owed. If you disagree with the IRS, however, you can dispute the charge. The best way to do that is to have your accountant handle the matter for you, since they will know what to say and how to respond to the IRS
Depending on your situation, contacting the IRS may be a smart first step. A revenue officer can explain things to you, and even provide advice on how to proceed.
A word of caution: watch out for scammers posing as the IRS. The IRS usually makes initial contact about tax problems by sending a letter through the US Postal Office. The IRS does not send email or make phone calls asking for credit card information, or special forms of payment such as gift cards.
The Bottom Line
Nobody wants problems with the IRS. However, problems do arise sometimes. When they do happen, talk to your accountant and take care of the problems as quickly as possible.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
By: Steve Jones