3 Ways Businesses Get Into Trouble With the IRS

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Running a business means dealing with taxes. Sometimes it feels like all a business does is keep up with FICA and local payroll taxes along with filing quarterlies for business income. Keeping up with taxes is a lot of work, and businesses that can’t afford an accountant have to do all the work in-house.

If the person preparing the tax return is not up to speed with tax requirements, a mistake can be made and cause the business to get into trouble with the IRS.

Following are some of the more common ways a business can slip up with taxes and cause itself a major headache.

Not Paying FICA Taxes


Image via Flickr by Matt From London

Even though businesses have to pay into the FICA taxes, these taxes are largely paid by the employees, and is meant for their future security as well as income taxes. An employer who withholds these taxes and doesn’t remit them to the IRS on a regular basis is taking money away from the employees. The situation gets worse when the employer uses the money for the business instead of paying it to the IRS — the IRS frowns upon “robbing Peter to pay Paul.” It’s best to earmark money for taxes and ignore its existence until it’s time to remit.

Not Filing an Extension

Sometimes it happens that the paperwork isn’t ready for filing by April 15. The IRS recognizes this fact and offers a six-month extension to allow a business to get its papers together and file without penalty. What this means is that a business should always file its taxes or an extension in order to avoid trouble. Not filing an extension increases the potential for an audit, penalties, and fines.

When a business has trouble with keeping its tax affairs in order, it’s time to seek help from a professional tax preparer. Bringing in a third party to take care of the taxes will prevent problems with the IRS, and it allows the business owner and employees to get more work done in a day.

Under Reporting Business Income

A business may find that its income has increased but so has its debt, and there may not be a lot of cash on hand to pay taxes. It’s tempting to go back over the return and find ways to under report income.

While this does have the effect of reducing the amount of taxes owed, it can also trigger an audit by the IRS. And if the IRS finds that there’s unreported income, the business will incur penalties and interest on what wasn’t paid. It’s never a good idea to under report business income. There’s always a chance the IRS will do an audit and find the missing money.

It is far better to file taxes in the way the IRS expects. Employers must make sure to remit payroll taxes so employees get their credit, file extensions when necessary, and properly report business income to avoid an audit. Honesty is the best policy to avoid trouble with the IRS.

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