As a small business owner or independent contractor, you know the dread of receiving a piece of mail stamped with the IRS return label. You almost don’t want to open the letter because you’re worried it will contain a bill or other bad news.
Sometimes, the mail is a harmless notice regarding your tax identification number, but other times, it signifies a problem with your taxes.
Taxes are a scary subject for many small business owners because they don’t understand them fully. When you encounter a tax problem of any variety, here are a few steps you can take to resolve it.
1. Understand the Problem
Information can be the antidote for fear regarding tax problems. When you know what you’re dealing with, you can generally correct the problem. Typically, business owners run into four types of problems with their taxes:
a) You Can’t Pay the IRS What You Owe
The IRS is more understanding than you might think. They don’t expect you to pay everything in a lump sum if you don’t have the money to do so. Instead, you can start a payment plan with manageable payments until the sum is paid in full.
b) The IRS Has Issued an Audit of Your Business
This is usually the result of the entity questioning the accuracy of your tax return. Most audits are not in-depth. They usually involve an underreporting issue, which can be resolved with minor changes. You may be subject to penalties or additional tax bills.
c) Your IRS Account Shows Discrepancies
The IRS may request additional information to properly process your return because it is showing discrepancies with your account. It could be a problem with IRS records, an incorrect payment, or even tax identity theft. Usually, it can be resolved quickly with simple correspondence.
d) You Failed to File Your Tax Return or Make Quarterly Payments
This can be a serious problem with serious penalties. Don’t become so overwhelmed with your responsibilities as a new business owner that you don’t file your taxes—you are liable to pay every cent you owe.
2. Don’t Ignore It!
The IRS or your state tax department will notify you of a tax problem as soon as they become aware of it. They will send you a letter in the mail alerting you of that problem. You’re expected to respond within 30 days of receiving that letter.
You might be tempted to ignore it, hoping that they will forget. But the government doesn’t forget about financial matters and procrastinating your response can cause greater problems.
Usually, those problems have hefty financial repercussions.
The IRS might fine you or charge a high-interest rate. Hence, by the time you finally respond, your problem is twice as big. In some cases, ignoring a tax problem could lead to repossession of assets.
If you’re feeling overwhelmed by a tax problem, seek help from a professional as soon as possible. They’ll help you navigate the steps to overcome the problem and avoid more trouble.
It’s important to note that the IRS communicates with businesses and individuals through U.S. mail only. If you receive a scammer phone call or email telling you that you owe back taxes or have another problem, you can ignore this fake notice.
3. Hire an Accountant
You may have been avoiding the expense of keeping an accountant on staff in order to reduce your overhead costs, but when you encounter a tax problem, it may be time to bite the bullet. Even a freelance or part-time accountant can offer you relief as you try to deal with a tax problem that’s beyond your expertise.
Look for an accountant who specializes in tax preparation and/or tax law. They should have extensive knowledge of tax documents and the inner workers of government tax entities. When you show them the problem you’re experiencing, they should be able to fix the problem without delay.
You won’t always need an accountant’s help. Often, you can outsource the problem to a company that specializes in fixing such problems, or you can just handle it yourself. You can make that call when the time comes.
4. Communicate Your Compliance
Resolving tax problems can take time. The IRS knows this, and they don’t expect you to fix everything within a week of receiving your notice. However, waiting too long to respond can cause more problems.
The key to leniency and understanding from this government entity is communication. If you quickly respond, explaining that you received their notice and are working to resolve the issue, they’re more likely to work in your favor as you work with them.
This is where an accountant or tax preparer comes in handy. They can communicate efficiently with the IRS to resolve the problem on your behalf.
5. Get Organized
After receiving notice of a problem with your taxes, sift through the relevant tax information you have on file to organize your response. You may need to review recent tax returns, receipts for expenses, and business accounts to ensure that you reported information accurately.
You should also learn more about tax laws relating to the issue at hand. You may be able to identify your error and correct the issue simply by educating yourself on the problem.
You should also keep a record of any communication from the IRS. As mentioned earlier, this entity will only communicate with you through U.S. mail, so keep all of the notices you receive.
You’ll also want to scan copies of their communication into digital copies to be preserved on the cloud. Include any responses you make in this file as well.
This will be invaluable when discussing the problem with an accountant, tax preparer, or attorney. It will also protect you if an inaccurate claim is made regarding your communication.
6. Keep Your Nose Clean
While resolving one tax issue, do everything you can to avoid another. Correct any past behavior that could cause more trouble in the future and organize your taxes to limit the chances of another problem arising.
The IRS is lenient when it comes to first-time offenders, but if you repeat the same problem, they are much less likely to work with you. They may demand that you pay all the money you owe immediately instead of accepting a payment plan. They could also press charges.
Do what it takes to stay out of tax trouble! Hiring a tax professional is a great way to do just that. You might also invest in tax account monitoring services to minimize future trouble.
7. Hire an Attorney
Sometimes, your tax troubles go beyond your ability to handle them. Tax fraud, evasion, and other problems are serious offenses that are punishable by fines or jail time, and even if you didn’t mean to break the law, you could be penalized severely for doing so.
When the problem is serious, such as an accusation of tax fraud or evasion, call an attorney right away. Let a tax attorney handle all communications and represent you as they try to clear your name or lessen the punishment.
You’ll also want to hire an attorney if the balance you owe is more than $10,000. Typically, back taxes of this magnitude come with accusations of breaking the law, and you’ll want an attorney to handle the backlash.
After graduating with his masters degree in accounting at the ripe old age of 20, Ralph went off to move up in the ranks at the Big Four accounting firms in Miami. He ultimately left KPMG as a manager in transaction advisory services to join Taxfyle in his hunt to find the truly elusive south Florida unicorn.
Fun Fact: Ralph is usually in charge of any construction projects around the office when he’s not forging new partnerships and engineering software (i.e. bribing Jeff with promises of Krispy Kreme donuts). Connect with him on Twitter and LinkedIn.
Note: The author’s views are entirely his own and may not reflect the views of Ace Cloud Hosting.
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