The Internal Revenue Service (IRS) is cracking down on small business tax fraud. In the midst of the COVID-19 pandemic, the IRS’ Small Business/Self-Employed Division established a new Office of Fraud Enforcement, and the agency has recently issued several news releases discussing common small business tax mistakes and warning of their consequences.
With this in mind, small business owners need to be very careful when preparing their annual and quarterly returns in 2021. They must also consider the very real possibility that mistakes (intentional and unintentional) could lead to unwanted attention from the IRS. Here are some important tips to keep in mind if the IRS audits your small business:
Tip #1: You Cannot Ignore an IRS Audit
Once the IRS initiates an audit, the audit will not simply go away. Revenue agents will thoroughly review your business’ tax filings (and perhaps your personal tax filings), and they will make a determination regarding whether your business (and perhaps you personally) owe additional tax to the IRS. To ensure that you are not subjected to unwarranted additional tax liability, you need to play an active role in the audit process. You need to do everything you can to ensure that it results in a fair outcome.
Tip #2: IRS Audits Can Target a Broad Range of Tax Law Violations
When facing an IRS audit, it is important to clearly understand the types of mistakes that can lead to additional tax liability—and potentially other penalties. While underreporting a business’s taxable income and falsely claiming business deductions are two common mistakes that can get small businesses into trouble, revenue agents will be looking at numerous other issues that could trigger business or personal liability.
Tip #3: IRS Audits Can Lead to Substantial Liability
Speaking of liability, the consequences of an unfavorable IRS audit can be substantial. In addition to potentially owing several years’ worth of back taxes, small businesses and their owners can also face interest on delinquent amounts, fines, and other financial penalties. If revenue agents find evidence of intentional tax evasion or tax fraud, they can also refer cases to IRS Criminal Investigations (IRS CI) and the U.S. Department of Justice (DOJ) for criminal investigation and prosecution.
Tip #4: Facing an IRS Audit Does Not Necessarily Mean You Made Mistakes
The fact that the IRS is auditing your small business’s tax returns does not necessarily mean that you made mistakes. Revenue agents may simply need documentation to substantiate your returns, or they may have questions that you can answer without issue. To make informed decisions about how to approach the audit, you will want to discuss your situation with an experienced tax attorney.
Tip #5: You Have Options if You Have Underreported or Underpaid Your Small Business Income Tax Liability
If you have underreported or underpaid your small business income tax liability, you may have several options for resolving the issue. For example, while one option is to simply pay what you owe, negotiating a settlement agreement or offer in compromise may allow you to resolve your tax debt for substantially less than the total amount.