None of us like having to pay taxes. We don’t like sales tax, payroll tax or income tax. We don’t want to see how much we earned, and then look at what is left over after the government takes their portion. But don’t try to finagle the numbers to pay less. If you are audited and didn’t pay all that was due, you will end up paying quite a bit more than the tax balance.
There are many different types of audits. Of course you are aware of the income tax return audit where your figures reported are compared to bank statements, QuickBooks reports, receipts, and other supporting documentation. There is a sales tax audit performed by your state to verify the amount of tax remitted is correct for the products sold and locations where the sales occurred. You may also be subject to a payroll audit where the mis-classification of workers can be costly. Many pay workers as freelance contractors when they really should be employees.
If you are found to have not paid the full amount of tax, you will be charged the tax due calculated by the tax agency, plus penalties and interest. Penalties usually start at 10% of the tax due. Interest accrues each month on the unpaid balance.
If you are found to have a large balance due, you may be able to work out a reduction of the tax with a signed guarantee that you will continue to pay the tax due on a regularly scheduled basis. This is generally called an installment agreement. To keep this in force, you must continue to pay your current tax due on time, file all required paperwork, and pay your prior tax balance consistently. Failure to do so may mean that the full tax balance is immediately due and payable.
To avoid having a tax balance due, adhere to the following:
- Never underpay your taxes by falsely reducing income or increasing expenses to reduce what you owe
- Know what is subject to sales tax, and collect the right amount based on the jurisdiction where your customer is located
- Properly classify workers as employees if that is what they truly are based on the factors the IRS and the states use to determine employment status.
Knowing you’ve done everything correctly will mean you won’t panic if you receive an audit notice. Go into an audit knowing you did nothing to purposely avoid paying your proper tax. You’ll be glad you did!
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