January not only brings a new year but a new tax season as well. For most individuals, tax season is exciting, as we await yet another generous tax refund. For small business owners, however, tax season can be frustrating or downright scary.
There’s a lot to keep in order when it comes to filing a business tax return, especially when you’re an employer. The IRS can come down hard on those who file tax returns with errors, whether intentional or not.
IRS Auditors Are on High Alert
All year long, the IRS is looking to make an example of tax evasion or tax fraud cases. So as an employer, all IRS eyes are on you… and you have a lot to lose.
Pyramiding: An Example of Unintentional Fraud
Well, let’s say you’re a start-up and you set everything up to properly withhold taxes from your employees’ paychecks, but ran into unexpected expenses (as we all do) and chose to keep your doors open with those collected tax funds.
Avoiding your employment tax obligations might seem reasonable for a cash-strapped, struggling company, but if you don’t circle back and pay what is owed, the IRS will inevitably catch up with you. It’s called pyramiding when the IRS decides to press charges.
Method of Payment Can Also Flag Fraud Suspicion
Paying employees in cash can also get you into tax trouble, as well as misfiling your employees as independent contractors. Filing false payroll taxes is another way to get the IRS after you.
Sending W2s with Errors May Not Initially Raise Flags, Not Correcting Them Will
Mistakes happen, and even the IRS can understand that. However, if you send out W2s with wrong information and do not fix it before the filing deadline, you can technically be found guilty of tax evasion. All earnings must be properly accounted for and taxed.
Even if you need to send out a corrected W2 to all of your employees, it’s better than taking the risk of not fixing the mistake and having the IRS find out.
Penalties Depend on the Charge: Negligence vs. Tax Fraud
When it comes to tax penalties, you could be charged with negligence or fraud. Negligence is an unintentional oversight, but it can still carry monetary penalties – usually calculated by the IRS itself. Fraud is committed when information (or tax money) is intentionally withheld.
Size of Mistake Matters, and So Does Intent
Penalties are assessed for employers based on the size or importance of error and the intention behind your actions. For example, simply failing to provide all employees with their W2s by January 31st can earn you a small penalty from the IRS.
File incorrect information, do it late, or fail to provide an accurate tax identification number, on the other hand? Those errors can mean big trouble. Outright tax evasion can land you charges with both the feds and the state of Colorado.
Don’t Delay If You Don’t Want to Pay
For employers who realize they’ve made a tax mistake on their employees’ W2s, it’s much better to come clean and fix it as soon as possible to reduce the amount owed in fines that can be assessed.
Whereas a charge of failure to file can have a penalty of $270 per return if not corrected, for instance, filing within 30 days of realizing your mistake means only a $50 fine per return.
An Experienced CO Attorney Can Help Explain Your Tax Situation
Even the IRS understands that mistakes happen, and it is often willing to work with businesses, as long as they address the mistake. This is especially true for smaller businesses.
The important thing to remember is that you must do your best to file your taxes (and withhold those of your employees) as accurately as possible.
If you’ve found yourself in a precarious situation with the IRS, reach out to an experienced tax attorney for advice. We can review your case, and help you develop your explanation for why your actions aren’t evasion and work with the government on finding a way to settle.
About the Author:
Kimberly Diego is a criminal defense attorney in Denver practicing at The Law Office of Kimberly Diego. She obtained her undergraduate degree from Georgetown University and her law degree at the University of Colorado. She was named one of Super Lawyers’ “Rising Stars of 2012” and “Top 100 Trial Lawyers in Colorado” for 2012 and 2013 by The National Trial Lawyers. Both honors are limited to a small percentage of practicing attorneys in each state. She has also been recognized for her work in domestic violence cases.