Find out what happens when you make mistakes on small business taxes
Not filing your business taxes correctly can have significant implications for you and your business. Mistakes on your tax return or not filing the correct returns can cost you money and, in extreme cases, can lead to criminal charges. Your tax return shows the Internal Revenue Service how much you and your business earned in the last year, and the information on your tax return determines how much you owe in tax.
Mistakes when filing your business taxes can lead to headaches down the road and can even impede your ability to keep your business open. This guide looks at the implications of not filing your business taxes correctly, and it explains why you should work with a professional on your small business tax return.
1. Paying too much in tax
Business owners who report too much income or underreport their expenses will end up paying too much in tax. These mistakes hurt your bottom line, and the Internal Revenue Service (IRS) is not going to reach out to you and let you know you’ve overpaid. The agency typically only contacts taxpayers when it’s worried that taxes are being underpaid.
2. Underreporting your income
You are legally obligated to report all your income to the IRS when filing your business taxes. This includes profit earned from your business and even items you receive in trade for products or services. People who underreport their income pay less income tax than they should, and the IRS is always on the lookout for businesses that are underpaying.
3. Incurring late filing penalties
Mistakenly filing your tax return late can lead to serious penalties. The fee for filing your income tax return late is 5% of your tax bill every month for up to five months, and it’s assessed the very first day that you are late. You need to understand tax deadlines as well as how to complete your tax return correctly.
S-Corp and partnership returns are typically due a month before individual income tax returns (or three months after the close of your business’s tax year), and the fee for filing these informational returns late is $195 per partner or shareholder.
C-Corp returns are due the same day as personal income tax returns (or four months after the close of your business tax year), and, like personal returns, they also have a late fee of 5% of the balance owed per month, up to five months.
4. Facing tax evasion penalties
The IRS will send you a tax assessment if the agency thinks you have made a mistake on your return, or it may ask for additional documentation to verify the information you reported when filing your business taxes.
The agency understands that sometimes people make mistakes, but if the agency believes that you have willfully committed fraud or evasion, you may face serious penalties.
The penalties for tax evasion can be up to $250,000 for individuals and up to $500,000 for corporations. You can also face up to five years in jail. Even if you simply made an error by mistake, the IRS has the right to cite you with negligence and assess a penalty of up to 20% of the unpaid personal or small business taxes.
5. Struggling to obtain funding
Most business lenders, and even personal lenders, will want to see your tax return. The return shows them how much money you earn and helps them assess if you are likely to repay your debts.
Mistakes can make your income look too low to handle repayments on a loan, or if the lender notices that you’ve made a lot of errors, they may assume that you don’t know how to run a business correctly. Both scenarios can hurt your chances to obtain funding for your business or personal loans.
6. Not being audit-proof
A mistake-free tax return backed by the right paper trail can make you audit-proof. An audit requires you to prove the income and expenses you have reported on your tax return, and people who pay small business taxes are much more likely to face an audit than individuals.
Audits can be long, grueling processes, but they are much easier if you have well-organized records and correctly filed tax returns. Audits shouldn’t strike fear into your heart — if you know your return has been done correctly, you should be able to get through an audit relatively painlessly.
7. Missing certifications
Being certified as a women- or minority-owned business can open the door to helpful grant and loan programs, but obtaining certification requires you to file your taxes correctly. Mistakes that obscure ownership of the company can hurt your ability to qualify for these types of programs.
8. Facing an unnecessarily high bill for small business taxes
You may be completing your small business taxes correctly but still miss significant opportunities for tax savings. Here is a quick example: Say that you run your business as a sole proprietorship or partnership. All the profits flow directly to you, and you face both self-employment and income tax.
This arrangement may work perfectly for a few years, but eventually, as your profits grow, you may benefit from electing to be taxed as an S-corp. Your S-Corp will essentially pay you a salary to run your business. You, in turn, pay self-employment and income tax on your salary, but the rest of the business’s profit only faces income tax.
Tax strategies like this can be nearly impossible to figure out on your own, but a trusted advisor can point you in the right direction.
This guide only covers the ramifications of mistakes on your personal and business income tax returns. It doesn’t even get into the issues you may face when you make mistakes related to other small business taxes, such as trust funds, sales, and excise taxes.
Get help filing your business taxes correctly
You work hard, and you don’t want to face unnecessarily high tax bills, penalties, or criminal issues. Franco Blueprint can help. We offer tax prep, accounting, CFO services, and more to small businesses — contact us today to learn more. Our services can help protect your business from the consequences of not filing your business taxes correctly.