As a small business owner, you probably know that willfully avoiding paying taxes will lead to severe problems with the IRS; however, IRS problems aren’t always a result of a business owner’s intentional actions. These are five ways business owners can get into trouble with the IRS that they might overlook or not realize.
1. Under-Reporting Income
In addition to the tax, you may owe on that income. Some individual self-employed people fail to pay taxes – either due to a lack of knowledge about tax laws or evasion. Hence, do not realize they are responsible for up to six years of back tax returns. This could also cause trouble with the IRS. Take note that if you do need to file back tax returns. Many deductions are not claimable on more than the most recent three returns.
2. Over-Reporting Expenses
If you’re not sure what qualifies as an actual business expense, consult with your tax preparer or accountant. For a business expense to be deductible, it must be ordinary and necessary. An “ordinary” expense is common and accepted in your business; a “necessary” expense is helpful and appropriate for your business.
3. Failing to Report “Trust Fund Taxes
Employers are required to deduct taxes from employee paychecks. These taxes are held “in trust” until they are paid to the U.S. Treasury and are not given to employees as pay. Hence, “trust fund taxes.” These taxes (sometimes known as “withholdings”) include income tax, Social Security, and Medicare. The IRS will consider this tax fraud, which is quite problematic, if not disclosed.
