Did you know that 71% of Americans who file their own taxes miss out on tax savings? The IRS doesn’t care if a professional tax consultant did your tax return or you did it yourself.
You’re responsible for the integrity of that tax return and must pay the tax owed.
With stakes like that, there’s simply no excuse for making these small business tax mistakes.
Read on to learn five common mistakes that occur when filing small business taxes.
1. Not Filing Tax Returns
It may sound odd, but some businesses don’t file tax returns at all. The worst part about this tax mistake is that it can go on for years before the IRS catches up with you.
Lucky for you, the tax code has an automatic three-year statute of limitations. If you fail to file tax returns for three tax years or less, tax auditors can go back only that far.
Small businesses must meet specific tax deadlines to avoid tax penalties and interest charges from the IRS. When tax returns are not filed on time or fail to pay taxes, you become subject to IRS rules and regulations.
This includes penalties and interest charges if not paid immediately.
2. Under-Reporting and Over-Reporting Income
Under-reporting income is a tax mistake self-employed entrepreneurs sometimes make. It’s either because they’re trying to keep more of their profits for themselves or don’t understand tax deductions they can claim.
If you can’t check it out alone, look for an experienced tax consultant.
But don’t be fooled that you can get away with under-reporting. The IRS knows some business owners engage in tax fraud.
Once they become suspicious of you, they’ll go through tax returns with a magnifying glass to establish tax evasion patterns.
Over-reporting tax deductions is a tax error most small businesses make when filing tax returns. The IRS allows tax filers to claim tax advantages for certain tax-deductible items.
Yet, this tax deduction tactic can be used as evidence against tax evaders.
3. Not Keeping Records of Expenses
The IRS wants records of every transaction you make during the year. This includes bank statements, invoices, receipts for purchases made with cash, credit cards, or checks.
Sometimes it’s difficult for tax authorities to figure out tax deduction/capital gain figures without concrete evidence. Keep these records safely. You never know when the IRS will want proof of your expenditure.
4. Under-Reporting Taxable Income
If you fail to report tax-deductible items on tax returns, it doesn’t mean you’ve escaped from the tax collection body. The tax authorities will use last year’s tax return to estimate taxable income for the current tax year.
If that number is off, you’ll get hit with a tax penalty or tax refund cut after filing your tax returns.
5. Improper Tax Deductions or Tax Credits Claims
When tax write-offs are claimed without proper supporting documentation, the IRS may send out an auditor. The auditors will look through your tax returns until they find how you pay your taxes.
This process can take months, and tax savings could be disallowed depending on what is found during the audit.
Why Not Stop These Tax Mistakes Now?
Correct filing of tax returns can save your business from hefty penalties from the IRS. If you’ve just started out and have no idea how filing is done, engaging tax services is necessary.
Are you looking for more business tools that can help prevent making more tax mistakes? Bookmark our blog for more tips on how to work out your taxes.