September 28, 2023
When you’re running a business, there is always something else that needs to get done. Your focus tends to be on whatever is in front of you, so events that are months away can sometimes fall off your radar. This can include filing your taxes.
The problem is, delaying your tax filing can result in errors. A rushed filing a few days before your deadline keeps you from being able to catch them.
The IRS is simply doing its job when they catch the errors for you. While most of the time, they’d rather work something out, if they do decide to hold you liable, you can bet on facing a variety of penalties.
Tax Fraud vs. Negligence
There are two primary ways you can catch the eye of an IRS auditor: negligence or active fraud. You can face penalties for both, but fraud carries a heavier cost than negligence.
Negligence is simply making mistakes on your taxes. Errors are usually obvious, including misspellings or incorrectly reporting something small. Most of the time, IRS auditors will interpret small issues as negligence, just because it is so easy to make these small mistakes.
However, some things are blatantly fraudulent. These actions are clearly done on purpose to deceive the IRS. Tax fraud can result in anything from a civil penalty of 75% of your true tax amount on top of your regular taxes to criminal charges.
Specific penalties can vary depending on the circumstances of your case (or even minimized with good legal representation).
Common Colorado Tax Mistakes
There are several things that can be considered either negligence or tax fraud, depending on your intentions. Doing any of the following by accident is negligence. However, if the IRS auditor believes you had bad intentions, then you can receive tax fraud charges and possibly go to prison. Avoiding these mistakes altogether can keep your criminal record clean.
Missing or Incorrect Information
It is incredibly important that the information you include on your taxes is accurate. Anything from the number of employees you have to the amount of income you received can be reported incorrectly.
Avoid making these errors first by keeping good records. Computerized systems are especially helpful for this. Many tax preparation programs will roll your business’s records directly into your tax forms, so you know nothing is forgotten.
Incorrect information can penalize you in a number of ways — a delay in your return, an audit, even charges of tax fraud. If the missing information makes it appear that you owe less, you’re much more likely to be investigated and charged.
Specifically, the charge is “willful failure to supply information,” which can result in up to a year in prison and $100,000 in fines.
Deductions help you keep your annual tax bill a little lower. However, if you claim incorrect deductions, you can get hit with a civil penalty or even criminal charges.
Incorrect deductions include phones that aren’t used solely for business purposes, trips that were partially vacations, and meals that were not for business meetings.
Professional software or tax preparation services are typically safeguard enough for these kinds of things. An experienced tax preparer will help you decide how to write off a home office or a business phone line if you can. It’s better to be safe than sorry in this respect.
If you do claim incorrect deductions, plan to pay that standard 20% civil penalty for negligence. You can also be charged with making false statements or fraudulent activity. These charges can result in fines of up to $500,000 for corporations and three years in prison.
Failure to Report Income
If your business operates heavily in cash, it might seem tempting to underreport the amount you bring in. This is one of the most penalized types of tax fraud, so beware. Failing to report all income can result in imprisonment of up to 5 years and a $500,000 fine for corporations.
Avoid these charges by taking meticulous records of all sales. “Cooking the books,” or keeping two sets of accounting documents, are almost always going to result in criminal charges. Avoid these by being honest about your income, and you should be fine.
Taxes are complicated, and it only gets worse when you’re running a business. If your taxes are filed incorrectly, good representation and good records can make the difference between accusations of tax fraud vs. simple negligence.
Filing your taxes early will help you avoid making mistakes in the first place, and save you time, money, and stress when it gets closer to April.
About the Author:
Denver-based criminal defense and DUI attorney Jacob E. Martinez is a knowledgeable and experienced litigator with a record of success providing innovative solutions to clients facing criminal charges of any severity. Mr. Martinez has been designated a Top 100 Trial Lawyer by the National Trial Lawyers and has been awarded both the Avvo Client’s Choice Award and Avvo Top Attorney designation, evidencing his reputation for his exemplary criminal and DUI defense work and high moral standards.