Paying too much or too little tax or falling foul of the IRS (Internal Revenue Service) through missing filing deadlines can rack up significant costs in possible extra taxes that could have been avoided along with maybe penalties and fines.
Sometimes basic errors can be made unwittingly in areas such as payroll and financial admin; understanding and using the correct paperwork is one way of keeping things in order and ensuring the right amount of taxes are paid.
IRS waging war on tax evasion
USA Today say that if all businesses paid the full taxes they’re liable for it would erase the national debt. The IRS, perhaps mindful of this assertion, is ever watchful of deliberate or genuine mistakes made by businesses and the self employed when conducting their tax affairs.
For example, USA Today further asserts that sole proprietor businesses under report income by a massive 57% both intentionally and unintentionally, so the IRS are targeting these types of business – especial those dealing predominantly in cash payments.
Even pros can get it wrong
While you’ll likely have an accountant to at least help prepare your tax information and calculate how much you’ll be liable for, they’re not infallible and there have been cases of businesses paying too much tax or facing IRS investigations due to a professional’s mistakes.
Although you’ll trust your accountant or tax advisor to do an accurate job, it’s important to check and satisfy yourself that your tax paperwork appears correct before signing anything off.
While business owners know expenses incurred in carrying out business activities can be offset against profits (tax deductible), they’re sometimes concerned about over claiming and facing an investigation or an audit by the IRS.
As a result, some businesses – especially sole proprietors who might not use an accountant to help with expenses – may not claim all they’re entitled to and lose money through paying more tax than they need to.
Other times extra tax paid is simply in error by not claiming expenses that would have been allowable.
Start up costs
A common mistake when claiming expenses is with start up costs; some assume that all the various costs in starting a business such as buying equipment, professional fees and so forth are all tax deductible expenses so are simply subtracted from any income generated in the first year.
This is incorrect: start up costs aren’t looked at in the same way as ‘usual’ expenses are. Currently only $5,000 of startup expenses can be deducted in this fashion before the business starts trading; expenses over this amount have to be depreciated over a 15-year period.
Filing tax information and late payments
It’s vital to get properly organized when it comes to preparing tax information, filing with the IRS, and paying taxes due.
If you’re late submitting and paying, costs can soon spiral in terms of penalties and late payment fees along with the tax you may owe on top. It’s important to have an idea well in advance of how much tax may be due rather than waiting until filing time and realizing there’s not enough money to settle the tax liability.
To avoid mistakes and errors it’s an idea to make quarterly payments in advance – you’ll receive a refund if it turns out you’ve overpaid.