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Watch out for these 4 consequences of misfiling your small business taxes!
Posted by Grace Townsley
February 23, 2023
April 15th is right around the corner, and it’s beginning to look a lot like tax season! It’s the time of year when Schedule Cs and 1099s abound, small business owners wade through stacks of receipts and the IRS eagerly awaits your painstakingly prepared return.
It’s also the time of year when small business tax questions abound for owners. Before you sign on the line and send your tax return off to Capitol Hill, we strongly advise every small business owner to have a qualified tax service or tax professional review their forms.
The consequences of misfiling your business taxes can be severe and costly, regardless whether you made an honest mistake.
Working with a professional tax service can help small businesses avoid these serious tax consequences:
1. Fees and penalties
The most common consequence of tax filing mistakes is a penalty. You may owe a penalty for missing a deadline, filing the wrong form or missing a required form.
The fees and penalties the IRS charges your small business can vary based on the severity of your mistake and how late the filing was. For example, if your business owes $1,000 in taxes but you file your return four months late, you may owe up to 25% of that amount in additional late fees and interest charges.
For small businesses that owe significantly more than $1,000 in annual taxes, that fee can take a sizable chunk out of your revenue.
For larger tax bills, or particularly late payments, the IRS may charge penalties with interest. That interest charge will continue increasing the longer your bill is outstanding, until it reaches the maximum rate allowed by the law.
2. Detailed audits
If you repeatedly misfile your small business taxes, or file a suspicious tax return showing unusual deductions or unlikely income sources, the IRS may choose to conduct an audit of your small business.
There are a few reasons why the IRS chooses to audit businesses and individuals:
If there is a significant discrepancy between the amount of income you reported and what was actually earned over the course of the year.
If your deductions appear to be excessive or unreasonable for a business of your type and size.
If you’ve filed the wrong forms — particularly if it looks like you intentionally filed incorrect forms to avoid taxes.
If your small business’ income varied widely from the year prior.
This isn’t a comprehensive list of audit triggers, but these are some of the most common reasons the IRS may want to take a closer look at your paperwork. For a broader look at what can precipitate a small business audit, check this top 10 tax audit triggers compilation.
If you’re selected by the IRS for an audit, it’s important to take it seriously and prepare accordingly. They will require proof of all expenses you reported and all income received throughout the year.
They’ll want to see your detailed records, financial documents, contractor payments and more. And you may incur additional penalties if they discover any tax mistakes.
3. Impacted credit
Did you know the IRS has the power to levy liens and garnish wages from those who fail to pay their taxes? If you fail to file your small business taxes on time or make a major filing error — and then avoid fixing the mistake and paying your fines — the IRS can take action against you.
The IRS can come after small business owners, sole proprietors and freelancers for improperly filed business taxes, even if the mistake wasn’t technically your own. The agency has the power to place a lien on any assets you own, including your house and car.
And if you have a full-time job, the IRS can even garnish your wages by taking a percentage of each paycheck until the debt is paid off. Taken together, these consequences can have a major impact on your overall credit and loan worthiness.
4. Criminal prosecution
In extreme cases, the IRS may pursue criminal charges if they believe there was an intentional effort to defraud them or evade paying small business taxes. If you misreported your income, took excessive deductions, miscategorized your employees as contractors, failed to pay your payroll taxes on time or took advantage of other ways to illegally minimize your taxable income, the IRS can turn to this measure.
Criminal prosecution for tax evasion often carries heavy fines and potential jail time of a few months to several years, depending on the severity of the offense. And unfortunately, a conviction for tax evasion will show up on your permanent record, resulting in potentially irreparable damage to your small business’s reputation.
It’s important to take filing your business taxes very seriously. The consequences of improperly reporting your earnings and meeting your tax obligations can add up to significantly more than the cost of your due taxes — and the cost just isn’t worth the risk.
If you’re unsure how to file correctly, or have questions about deductions and tax credits available to you, speak with an accountant who specializes in small business tax services before submitting your return. They’ll help you meet your financial obligations, file the proper forms on time and potentially minimize your tax liability using legitimate deductions and credits. In addition, you can expect four key benefits when outsourcing your tax services to a qualified professional for year-end tax planning and beyond.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.