Remitting tax is a legal requirement, and it is the responsibility of all businesses to comply. Filing taxes is a complex process, especially for big businesses. That’s why most of these businesses engage tax specialists or use tax filing software. Making any mistake during tax filing can result in penalties by the IRS. These penalties are detrimental to your business, so you need to be careful when filing your taxes and also file them in time.
Here are six ways to avoid being penalized by the IRS.
1. Do Not Evade Tax
Do not confuse tax avoidance with tax evasion. It is legal to avoid tax. All you need to do is to take steps to ensure you don’t pay more tax than necessary. For example, you can take credits and deductions to avoid paying personal and business taxes. As long as you support these credits and deductions with authentic documents, you’ll have no issues with the IRS.
On the other hand, tax evasion involves using illegal methods to avoid paying taxes. IRS considers tax evasion as willful acts of commission or omission to prevent you from paying tax. If the Tax Court or the IRS determines that you are evading tax, you’ll face increased penalties and fines, or you may be jailed.
2. Don’t Under-Report Your Income
The amount of tax you pay depends on your business income. The more profit you make, the higher your tax will be. For this reason, you may be tempted to under-report your income so you can pay less tax.
One way that businesses use to under-report their income is by not reporting large cash transactions, keeping their deposits to below $10,000. Note that the IRS requires all deposits equal to or more than $10,000 to be reported. Other businesses also pay their employees in cash to avoid payroll taxes. If you want your business to be safe, ensure you report all your incomes.
3. Don’t Over-Report Business Expenses
Expenses reduce profits, hence the amount of tax due. Some businesses have the habit of over-reporting their expenses, so they can pay less tax. One way businesses use to over-report their expenses is to treat personal expenses as if they are business expenses. For example, treating your home utility bills as business expenses amounts to over-reporting your expenses. If the IRS discovers this, you’ll be penalized.
4. Report All the Employee and Sales Taxes
Failing to report payroll and sales taxes is one way that many businesses use to avoid paying taxes as required. Payroll and sales taxes are referred to as trust fund taxes because the business collects them from employees (for payroll taxes) and customers (for sales tax).
As a business, you are supposed to hold this money in trust, then transmit it to the tax agency. Failing to submit these taxes amounts to a tax fraud that has dire consequences.
5. Don’t Involve in Lifestyle and Tax Fraud
One way the IRS will catch you when you involve yourself in tax fraud is to assess your lifestyle. If you lead a luxurious lifestyle, then it is likely that you’re not accurately reporting your business income, and this can trigger an investigation.
Leading a rich lifestyle that exceeds your income is a clear sign that you are evading tax, and you can face penalties. However, if you’ve been slapped with a penalty unfairly, you can seek for IRS first time penalty abatement. Let a tax attorney help you through this, and you can get relief.
6. Avoid Late Filing of Taxes
Filing your taxes late can be a very expensive affair. Most business owners think the tax filing deadline falls on 15th April. However, if you are running a partnership or your business is classified as an S corporation, then your tax filing deadline will be on 15th March. Failure to pay your tax in time will attract a 5% penalty charged on the amount you owe.
As has been stated, it is required by law that you submit your taxes to the government. Involving yourself in tax evasion or tax fraud can land you in jail. If not, you may be required to pay fines and penalties that can injure your business. Being a law-abiding citizen is the best way to run a successful business.
Samantha Higgins is a professional writer with a passion for research, observation, and innovation. She is nurturing a growing family of twin boys in Portland, Oregon with her husband. She loves kayaking and reading creative non-fiction. If you are seeking an IRS first time penalty abatement, consider getting help from the professionals at Enterprise Consultants Group.