A challenge all business owners face is failing to correctly file their taxes and not knowing their tax liabilities. In fact, many owners suffer anxiety and stress over it.
Aside from the complexities of doing taxes, there is the issue of errors. Making tax mistakes can come with significant consequences, such as audits, fines, and penalties if you underpay or submit a return with errors. Or it could result in your business paying more taxes than it’s required to.
Whether underpaying or overpaying your taxes, the result is similar – it’s going to cost you time and money. Ideally, you want to avoid tax filing mistakes as best as you can.
Common Tax Mistakes to Avoid During Filing
Knowing the most common tax mistakes is a good place to start. Remember, some businesses will file a separate tax return while other small businesses file their business information with their personal tax return. Keeping that factor in mind, let’s take a look at common tax mistakes to avoid while preparing your tax return.
Filing too early
Some business owners may want to simply get the tax process over with and file as soon as they can. However, this can be a mistake. Filing prematurely might result in missing important tax reporting documents and the tax return missing key information, leading to processing delays
Incorrect filing statuses
Getting your filing status correct is critical whether you’re filing an individual or business tax return since businesses are taxable entities. Your status will determine how you are taxed.
If you include your small or home business on your individual return, you’ll choose between single, married filing jointly, married filing separately, head of household, and qualifying widow or widower with dependent child.
Certain business structures must file their own return. Corporations must be taxed as either an S-Corp or a C-Corp. LLCs can be taxed as Disregarded, Partnership, S-Corp, or C-Corp. Each has its pros and cons, but either way, you want to get it right when you file, lest you run into potential problems.
Entering wrong SSNs
Always double and triple-check any Social Security numbers on a tax return. A mistake can lead to problems with the IRS and potentially create entanglements or scrutiny that could have otherwise been avoided. Make sure the required Social Security numbers are entered exactly as they are displayed on the Social Security card.
Incorrect/inaccurate banking information
Incorrectly entering bank information or providing the IRS with inaccurate banking information on your tax return will quickly cause issues for your return. Once accepted by the IRS or state, this cannot be edited or changed since processing of the return has begun.
If you owe taxes, the tax collecting agencies will be unable to collect the tax due if they try to withdraw (if you chose this option), resulting in potential late penalties, although you can quickly send in a check and mail it in or go to the IRS website and pay electronically. If you’re getting a refund, the bank will refuse the deposit, and you’ll have to wait weeks or longer to receive a check.
Whatever the scenario, it’s better to simply proofread carefully and get it right the first time, avoiding hassles or potential penalties.
Submitting incorrect forms or forgetting to sign
Depending upon the legal structure of your company, the industry you operate in, and whether you have employees working for you, you’ll have to know which forms to file, including but not limited to estimated income tax, payroll taxes, and sales tax. Working with a professional can help alleviate this problem and ensure you file the correct forms and avoid a potential audit of your tax return. Remember to always sign your return.
Underestimating or underreporting taxes owed
Many businesses must estimate the taxes they’ll owe and make quarterly payments. It’s not an exact science, but the U.S. government expects businesses to make a suitable estimate. If you’re found to be intentionally underestimating your company’s tax obligations, this can lead to penalties.
Reporting income accurately is also critical. If the IRS feels you were careless or intentionally negligent/fraudulent in your tax return, you can get hit with steep penalties. Always double-check your math.
Over-reporting business expenses
Most businesses have some level of increasing deductions to reduce the amount of tax obligation. This is perfectly legal and encouraged. However, if a business abuses this ability by making deductions that either didn’t exist or over reports expenses to increase their deduction, this may flag an audit by the IRS.
What Happens If You Make Tax Filing Mistakes
Tax filing mistakes can lead to even more stress because you’ll have to do your best to rectify or potentially face an audit. Mistakes made on tax returns typically lead to one or more of the following scenarios:
Filing an amended tax return
Your company can legally amend its tax return to make corrections, even if you’ve already submitted your return, as long as you do this within three years of the original tax filing deadline. Sole proprietors and single-member LLCs will use Form 1040X (Amended U.S. Individual Income Tax Return). Corporations will file Form 1120X (Amended U.S. Corporation Income Tax Return).
Paying penalties
If you miscalculated your taxes or made other errors leading to IRS or state penalties, you can pay the penalty to resolve the situation. Keep in mind that if you owe money, you’ll also have to pay the interest due.
Getting an IRS audit
The IRS uses complex criteria to determine who gets audited, and they are usually not random. This is a good reason to avoid making common tax filing mistakes. If you are chosen for an audit, it’ll be done by mail, at an IRS office, or at your place of business, and the latter is common for businesses. The process can be lengthy and full of stress.
In any of the above three scenarios, it’s a good idea to discuss your situation with an accountant, tax attorney, or other tax professional to ensure you’re taking the right course of action. Tax fraud is a serious offense, and you don’t want to inadvertently take the wrong steps to rectify a situation if you’ve made one of the most common tax mistakes.
How to Avoid Making Any Mistakes On Your Taxes
While mistakes do happen, taxpayers can do the following to avoid potential errors and headaches when filing:
● File electronically to avoid errors
● Use tax software to assist with math and various calculations (handwritten taxes and math calculations typically result in a higher percentage of errors)
● Keep careful records and save receipts, documents, and other relevant information required to file an accurate tax return by using these accounting tips
● Carefully review your tax return – double and triple proof your personal information, business expenses, revenue, credits, and other required information, and make certain you have filed all proper tax forms
Another great step you can take is to work with a tax professional, especially if you aren’t confident in your return. Professionals are up with the latest laws and know the best ways to legally file. A common question people often ask is, “Are accountants liable for tax mistakes?” It’s important to know that, ultimately, you are responsible for your company’s tax return, so choose the professional wisely.
Properly Obtain Your EIN
Businesses that hire employees are required to obtain an Employer Identification Number (EIN) to file taxes. Even sole proprietors or home-based businesses with no employees can benefit from obtaining an EIN, often also referred to as a “tax ID”. To obtain your EIN, take the following steps:
● Assemble details about your company, including its legal name, DBA (“doing business as”), and its business address.
● List the person responsible for the business and their tax ID (might be a Social Security Number or an Individual Tax Identification Number)
● Identify your company’s business structure, e.g., sole proprietorship, partnership, LLC, or corporation
● Choose the reason why your company needs an EIN
● Give an estimation of how many employees you plan to hire or provide the number of employees you currently have working
Once you have your tax ID, you can properly file your taxes. Other benefits include having the ability to open business bank accounts, apply for business loans to obtain funding, or being eligible to apply for certain permits and licenses.
Conclusion
Filing business taxes can be a real headache. One of the best ways to reduce your stress is to simply be proactive. Think about your taxes throughout the year so you make timely and correct estimated payments and keep good records. Dealing with taxes isn’t necessarily enjoyable, but avoiding the above and other common tax filing mistakes businesses will help make the process easier.