What are common small business tax mistakes?
Overreporting and underreporting income are two of the most common tax mistakes made by small businesses. Sometimes businesses fail to include all their income because of poor recordkeeping or a miscalculation. After all, tax laws are not exactly clear. Clerical mistakes, such as the incorrect name, social security number, employer identification number or address, are also common errors that are often simple to correct.
Although it is not advisable, it is also not uncommon for small businesses to intermingle business and personal finances, especially if a business owner has just one bank account, or is just starting out. Intermingling finances can make it difficult to determine if expenses are business or personal. As a result, expenses listed on a tax return may be overreported or underreported. Small businesses may also fail to claim all entitled tax credits or deductions because they are unaware of their availability.
Another common mistake is filing the wrong tax return. Small business owners may often only file a Schedule C attached to their individual personal tax return. If the business is incorporated, however, filing a Form 1120 may be required. The type of tax return depends on how the business is formed with the state, the number of owners, and if the business has made any tax elections with the IRS. If you are unsure which tax return to file, you may want to talk to a lawyer or tax professional. A tax return, or an application for an extension, must be filed by the due date to avoid penalties. The due date, however, may vary depending on the tax return your business must file.
How do I handle errors after I file?
If you discover an error on your business tax return after filing, you may want to discuss the problem with a lawyer or tax professional. Some errors may not require an amended tax return. Other errors may be corrected on an amended tax return.
If a tax professional prepared the original return, then they can usually help prepare the amended tax return. If you prepared the tax return, it may help to talk to a lawyer to determine how to proceed with correcting the inaccurate tax return. You can make a Small Business Tax Worksheet to help you better understand your situation, and to organize your information for a lawyer or tax professional’s assistance.
If an amended tax return results in additional taxes, you can pay the owed amount in a lump sum or over time. After filing the amended tax return, the IRS may assess penalties and interest, or if you overpaid, the IRS may issue you a check. If the IRS issues penalties after the amended tax return, you may want to ask if those penalties can be removed or reduced. Depending on the penalty and your prior tax filing record, the IRS may agree to reduce or eliminate the penalties. The IRS, however, generally does not reduce interest charges.
In addition to filing an amended tax return with the IRS, amending a state tax return can also prove helpful if the same mistake carried over on your state return.
What tax preparation steps can help reduce mistakes?
Avoiding tax mistakes is not out of reach for any small business owner. It takes some planning, but a few basic steps can go a long way. A few of the best ways to reduce mistakes on your business tax returns include:
- Keeping accurate records of income and expenses.
- Scheduling your tax deadlines well in advance of the actual due dates.
- Working with a tax professional.
Whether you use software for your finances or you keep a paper ledger, your tax return can only be as accurate as your bookkeeping. It can be easier to keep track of your business income and expenses throughout the tax year, instead of waiting until tax time.
Many small business owners have trouble keeping track of their business income and expenses because they use the same bank account for their business and personal finances. Not only does that make it difficult for you and your tax professional, but intermingling finances could be detrimental in the event of a tax audit. The IRS will typically be more critical during a tax audit if personal and business finances are intermingled.
A tax professional can help you reduce the risk of making mistakes on your business tax return by spotting issues before the tax return is filed.
Will you be in legal trouble if you make a business tax mistake?
The IRS has the authority to pursue civil and even criminal charges if you commit tax fraud or evasion. Simple mistakes on a business tax return, however, rarely rise to the level of criminal charges. If you lied on your business tax return, omitted income, or listed false expenses, you may be at risk of being charged with fraud or tax evasion. If you believe that the errors on your tax return are significant, you may want to contact an attorney to determine the best course of action to fix your inaccurate tax return.
In most cases, you can simply file an amended tax return. You may be assessed penalties and interest, but there is usually a low risk of criminal charges. Additionally, you may request to have penalties waived, especially if you have a good history of filing and paying your taxes timely.
Working with a tax professional can help you avoid filing inaccurate business and personal tax returns. If you have questions about your taxes, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.