Dealing with taxes can be stressful and exhausting for any business owner. Sadly, filing tax returns for your business is something you must do. Your biggest goal as an entrepreneur should be to lower your tax bills by not being a victim of tax audits, fines, and penalties from the taxman. Well, simple errors could cost you a lot in cash that should have been used to grow your business. To help avoid mistakes that could bankrupt your business, we have compiled some costly tax mistakes you should be aware of.
Not filing taxes
This sounds obvious, but it is one of the major mistakes entrepreneurs commit. Any entrepreneur can get busy sometimes that filing taxes is often the last thing on the agenda. Sadly not filling, ignoring to file, or filing late will result in additional costs that you should avoid. Luckily you can apply for a tax filing extension. However, please note an extension is not an exemption not to file your taxes.
Mixing personal and business finances
Most times, certain assets such as a car or a computer will have both business and personal use. In essence, most entrepreneurs struggle with separating business expense and personal finances. However, you can avoid this by keeping a separate business and personal accounts. Use a different business credit card to ensure that all your business expenses and income are kept intact.
- Commingling is a serious offense that could lead to deregistration. Hire an accountant to help you keep the two accounts separate.
Tax evasion and avoidance
Although these two terms sound similar, they are radically different. Tax avoidance is legal, whereas tax evasion is illegal. For instance, tax avoidance involves not paying more tax than necessary by taking deductions and credits as long as they are supported by IRS regulations. Generally, tax avoidance lowers your tax bills by structuring your transactions to reap the largest tax benefits. Tax evasion, on the other hand, is an attempt to reduce your tax liability by deceit, concealment, or subterfuge. Please note that if the IRS deems to be “willful” tax mistakes, it could result in increased fines and penalties, including jail time.
Improper and fraudulent tax submissions
Improper and fraudulent tax submissions usually involve a myriad of things. For example, padding business expenses, overstating or understating your deductions, including credits. Sadly some of these errors are a result of human err and cause serious consequences like:
- Punishment for a frivolous tax return (the amount of tax represented as incorrect).
- Receiving an underpayment penalty for the tax fraud
- Penalty for filing an erroneous claim
- Criminal prosecution for fraud and false statements, fraudulent return and identity theft, failure to file a return, and supply information.
Tax issues can be complex and lead to legal battles. That’s essential for businesses to work with tax attorneys who will represent clients regarding IRS matters to protect your business. Working with a skilled tax attorney is the best way to avoid IRS issues in any business.
Hiding or transferring assets of income
This type of fraudulent activity takes different forms. Some entrepreneurs might try to conceal some of their funds in a bank account or improperly allocate income to a related taxpayer in a lower bracket. Remember, your business structure or legal entity determines the amount of tax you pay. Concealing assets and channeling taxes to the wrong legal entity is considered fraudulent.
Faking workers classification
Misclassification of employees is a common practice among many employers. Most of them do it with the intention of not paying taxes. Some employers classify employees as independent contractors, yet they are not. It is important to know that misclassification is considered fraudulent and can result in high penalties from the taxman.
Failing to keep records
Inefficient record management programs can lead to costly consequences for your business. It is not only a threat to your budget but can also lead to serious tax problems. Poor record management impacts you financially and legally. Remember, not being able to produce records in a timely fashion leads to cases of retention tracking. It is essential to have someone in place to handle all record keeping matters for your business.
The bottom line is that tax issues can be severe and result in huge penalties and fines. It is quite clear that some of these mistakes are kindled from ignorance and lack of proper knowledge on tax matters. Do a lot of research on tax laws or policies applicable in your state to keep your tax bill on an absolute minimum. More importantly work with the right tax professionals to avoid making costly mistakes.