EA - IRS Red Flags - Tax Return Mistakes to Avoid

IRS Red Flags for Business Owners: Tax Return Mistakes to Avoid

Taxes are one aspect of running a business that most entrepreneurs dislike. Not only do you need to be sure that the cash is available when tax time rolls around, but it can be a burden to keep up with the tracking and paperwork required for tax preparation and filing.

Taxes are unavoidable, both for businesses and individuals. Even though it seems like taxes are cutting into your profits, it is essential that you maintain proper systems to ensure accuracy in your payments. If tax return mistakes are made with your quarterly payments or annual filing, then you could be paying a lot more in fines and fees charged by the IRS.

Annual Tax Filing: How it Works

The IRS requires that you submit an annual tax report. But this once-a-year paperwork isn’t the only time of year that you need to think about taxes. Often, other reports and payments need to be made throughout the year, such as payroll taxes, quarterly estimates, sales tax, and more.

When mistakes are made on your tax return, then you can expect the IRS to charge fines for the error. Additionally, interest costs are often accrued on the unpaid amounts – usually calculated monthly for the length of time the mistake went uncorrected.

When you file your taxes each year, the IRS is thorough about analyzing your income and deductibles. Potential mistakes are easy to avoid. The key is to stay away from a DIY approach with tax preparation and filing. Instead, it is best to hire an experienced business tax accountant so you can avoid these common tax return mistakes. The small fee paid to an accountant is worth the peace of mind in knowing that your tax paperwork is accurate and ready to be filed with no mistakes or errors.

Underpaying on Your Estimated Payments

When employees are receiving regular paychecks, taxes are withheld and paid through the payroll processing system. As a business owner, you have to make sure that these taxes are paid on time to avoid potential penalties. Even if you aren’t paid a salary paycheck through your company, it is still essential that you are current with your quarterly estimated payments.

If the IRS finds that you underpaid on your taxes during the year, then you could be facing penalties for the underpayment. Not only do you need to pay the difference, but it will be a bigger amount due because of the consequences of underpaying. When the underpayment is seen as an act of fraud or negligence, then the fines are much higher compared to an innocent mistake.

An experienced tax accountant can help with accurate estimates, making it easy to dial in the right amount that should be paid when quarterly deposits are due. The goal is to pay enough to avoid penalties, without overpaying. If your quarterly payments are more than you owe, then you will receive a refund when the annual taxes are finalized. But, the extra money is essentially a free “loan” to the IRS. A good business accounting team can help you dial in the “sweet spot” by looking at your expenses and income to determine the estimated amount that needs to be paid.

Common Tax Return Mistakes

These are some of the most common mistakes that are experienced by small business owners:

  1. Numbers Don’t Match Up: Not only will the IRS look at the numbers on your tax return, but they also compare the data with Form W-2 and Form 1099 in their records. If the income sources don’t match up, then you could be running into a problem. If you report a smaller amount than is listed on the W2 or 1099, then you could receive a bill for the unpaid taxes, along with interest and penalties. The best thing you can do in this situation is to review the numbers with your business accountant to determine if the calculations are accurate. If needed, your accountant can help you with a tax amendment submission.
  2. Failure to File the Right Forms: The necessary tax forms vary depending on the structure of your business. For example, sole proprietors don’t have to fill out some of the forms that are required for certain types of corporations. Make sure that you are working with a small business accountant who understands the various tax forms. This personalized approach can be designed to optimize your tax strategy and ensure that you don’t miss the forms that need to be submitted to the IRS throughout the year.
  3. Timing of Tax Filings: Deadlines matter to the IRS. It is important that you are consistent with submitting the paperwork and payments before the listed deadlines for each of the forms. Serious, expensive consequences might be faced for missing a deadline. Keep in mind that you always have the option to file for a tax extension if you don’t think your tax filing will be ready by the due date. Your small business accountant can assist with the submission of Form 4868 to request the extension. Just because you file an extension, doesn’t mean that you can delay your payment. This process only gives you more time for tax filing, but the payment is still due by April 15th each year.
  4. Record Keeping Issues: You can’t play it fast and loose when it comes to small business accounting. It is important that you are diligent with record keeping throughout the year. This system needs to track both income and expenses down to every penny that is sent and received. In the unlikely case that you are facing an audit, your records need to show how the tax return numbers match up to the transactions that moved through your bank account. These records should include everything from miscellaneous office expenses to the petty cash drawer and cash tips that were received.
  5. Quarterly Taxes: As mentioned above, business owners have an obligation to make estimated tax payments throughout the year. These estimated payments need to be paid on a quarterly basis, instead of waiting for tax day to roll around on April 15th. As a self-employed business owner, you need to file your estimated taxes four times a year. Then these numbers are calculated into your final tax filing for the year. These estimated payments should total at least 90% of the taxes that you need to pay for the year.
  6. Tax ID Mistakes: When one number is off on the Social Security Number or Employee ID Number, it can throw a wrench when the IRS is finalizing your filing for the year. Always check and double-check tax forms to ensure there aren’t any errors in the numbers. If a mistake is made by listing the wrong SSN or EIN, then you might need to refile the full tax return for the year. Another common mistake is a misspelling in the name.
  7. Account Numbers: Another number you need to pay attention to is the account numbers submitted for your bank. Whether you are paying an amount that is owed or receiving a refund, it can be a disaster if the money is moved from the wrong bank account. Make sure you are using the right bank account number and routing information to avoid the tax refund mistakes that result in a refund being deposited into a stranger’s account.
  8. Accuracy of Filing Status: Every person must list their filing status since it impacts the amount paid. For example, employees need to choose single, married filing separately, married filing jointly, head of household, etc. As an employer, you need to require new hires to fill out W4 forms which indicate the person’s filing status. Tax calculations need to correspond at all times. You also need to ensure that your personal filing status is accurate.

Talk to an Experienced Accountant to Avoid Tax Return Mistakes

Most small business owners and entrepreneurs don’t have formal training in accounting, which means that a DIY approach often results in tax return mistakes. Even if you are detailed-oriented and thorough with your filing, there are common mistakes that can be avoided by working with a tax professional.

Hiring an accounting team to assist with tax filing means that you can avoid these tax return mistakes and save money at the same time. Yes, you will need to pay for the accounting services that are provided. But it is a great investment when you consider the money saved through strategic tax strategy and by avoiding expensive fines and fees that will add up if mistakes are filed in the paperwork.

You don’t need to stress over the tax paperwork and financial tracking throughout the year. Let the experts assist with all necessary accounting and bookkeeping services so you can focus your attention on other responsibilities that come with being a business owner.

Easier Accounting is here to offer the full-service accounting systems that you need. Our team focuses on small businesses, which means that we have the hands-on experience you deserve. Contact us today to learn more about the ways your business will benefit from these available services: (888) 620-0770.

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