While most tax penalties are avoidable, there are significant fines and penalties assessed for each mistake. Protect your profits this tax season by avoiding the following pitfalls that are commonly found in small business returns.
Accidental or not, inaccurate tax returns are costly. The IRS can slam your business with a 20% penalty for errors in reporting income or if you substantially underestimated the amount you owed. Most of the time, this penalty occurs when a company has trouble validating a deduction. To avoid this mistake, keep thorough and accurate records that can support the deductions you use each year.
An inaccurate return escalates to a case of civil fraud when the IRS believes an error was intentionally made. The IRS assesses a fine of 75% of the tax deficiency. Though rarely done, a criminal charge can be issued along with the fine. However, only 2% of audits even fall under the category.
If you file your return on time but pay your bill late, the IRS will add a penalty of 0.5% to 1% per month. Filing late, however, will result in much harsher penalties. The IRS can fine your business 5% of the balance due per month until the total fines reach 25%. What’s worse, if you file and pay late, the IRS will impose a combined penalty of 25% the amount owed until it reaches a maximum of 45%.
Charitable Donation Mistakes
While charitable donations make excellent tax deductions, a failure to document donations properly can result in a 25% penalty. You need a thorough and accurate list of all charities, the amount you donated, and a donation receipt. Also, it’s important to note that not all charities are recognized by the IRS. Before using the charitable donation deduction, make sure the company is reputable and IRS-approved.
Tax penalties can also be assessed if you fail to meet your quarterly quota. Just like individuals, every small business must estimate the amount they will owe for the year and pay quarterly installments to the IRS. Since quarterly payments must all be equal, you can’t catch up later if you fall behind.
All IRS penalties can be stacked, which means late fines can be combined with inaccuracy fines, or others. It is crucial to know the tax and filing requirements well. Keep thorough and accurate records, and consider hiring a qualified account to review your books. We at Kippers Insurance want to arm you with the right information to protect your assets and keep your hard-working dollars where they belong.