Running a small business comes with many challenges, including navigating complex tax laws and avoiding litigation. Unfortunately, small business owners often find themselves facing tax disputes and audits.
There are a few common tax litigation issues small businesses encounter.
1. Incorrect tax classification
The IRS has strict guidelines on contractor classification, and misclassification can lead to unpaid payroll taxes, interest and penalties. To avoid misclassifying workers, small businesses should consult the IRS rules and properly document contractor relationships.
2. Unreported income
Failing to report all taxable income is another common issue for small businesses. You need to report even cash income, as well as bartered services and other non-cash transactions. Thoroughly tracking all income sources and maintaining detailed business records can help small businesses avoid this major red flag.
3. Inadequate documentation
Meticulous record-keeping is key to surviving a small business tax audit. The IRS requires documentation to support all figures on tax returns, including income, deductions, credits and other matters. Lacking proper documentation makes it much easier for the IRS to dispute a tax return. Small business owners should retain organized tax records and only claim deductions they can substantiate.
Avoiding tax litigation is important for small business success. Unfortunately, with the complexity of tax laws and the demands of running a business, mistakes can happen. Investing time upfront into compliance and bookkeeping yields major dividends when tax season rolls around each year. With the right knowledge and preparation, small businesses can steer clear of lawsuits and focus on growth.