This post was written by our friends at Larry L. Bertsch, CPA & Associates, a top certified public accountants firm that has been offering quality accounting and tax preparation services to the entire Las Vegas market since 2003. For help with your business accounting and tax prep needs, please contact them to schedule a free consultation by calling (410) 872-8376 or completing this brief form.
Reporting taxes for your business is usually more complicated than reporting taxes for your personal life. Unfortunately, this means you’re more liable to err in your reporting, which might cause the IRS to slam you with expensive penalties and other consequences you might not have known existed.
With the help of an experienced tax accountant, however, you may be able to avoid some of the more common and severe consequences if you do overlook something.
Tax Audit Consequences: Breaking Down the Causes and Effects
In the event of a business tax audit, there are three different types of penalties you could receive:
- Accuracy-Related
- Failure to File and/or Pay Taxes
- Civil Fraud
Here are a few examples of each:
- Penalty for Understating Your Taxes: Penalty assessed in the event you understate your business’s income by $5,000 or 10%, whichever turns out to be the larger sum. The consequence, like all accuracy-related penalties, is 20% of the amount you underpaid, though sometimes the penalty can be as much as 40%.
- Misstating the Value of Your Property: If you over- or undervalue your business’s property by 200%, you will receive a 20% penalty. Like other accuracy-related penalties, the penalty can increase if the misstatement is substantially larger.
- Understating Other Reportable Transactions: With this accuracy-related penalty, if you were found to have understated tax liabilities, such as transactions with tax shelters or tax avoidances, you could face a 30% penalty rather than the standard 20%.
- Penalty for Underpayment of Estimated Taxes: To avoid the 20% penalty, you must pay at least 90% of your tax bill. If you pay 100% of your bill, you’ll avoid any penalties altogether.
- Failure to File Tax Return Penalty: Of all audit-related penalties, this is the easiest to avoid. Simply keep track of your calendar and make sure to file on or ahead of time. If you forget to file on time, the penalty can be as low as 5% each month to as high as 25%.
- Failure to Pay Taxes Penalty: If you haven’t paid your owed taxes within 21 days of receiving a notice from the IRS, they will add a 0.5% penalty for every additional month you do not pay the amount. However, the penalty can be reduced to 0.25% if you enter an installment agreement. On the other hand, the rate can increase anywhere from 1% to 25% depending on your level of cooperation.
- Fraudulent Failure to File: Unlike the failure to file penalty mentioned above, which comes as the result of common human error, a fraudulent failure to file is the purposeful attempt not to file your tax return, which is considered a criminal offense. You could potentially be sentenced to up to one year of jail time and required to pay $25,000 for every year you do not file.
- Additional Penalty After Failure to File/Pay Taxes: If you failed to file your taxes and an audit revealed a second charge (accuracy-related penalty, fraudulent failure to file, or civil fraud), the penalty is an additional 3% annually to your initial failure to file/pay penalty.
- Civil Fraud Penalty: One of the most severe and expensive penalties, a civil fraud charge results in a 75% penalty. Thankfully, most taxpayers charged with this penalty aren’t criminally charged and jail time is rare.
Every consequence above can be avoided with diligent filing and financial awareness. Balancing your finances and being honest in your tax returns will keep the IRS off your track — and away from your bank account.
Your business is difficult enough to maintain and grow on even the best of days. Take care not to create unnecessary problems and keep your finances secure.