How Hiring a Bookkeeper can Keep you from Trouble with IRS
When it comes to the IRS, business owners should not play around. Sadly, common business tax return errors prompt the IRS to audit 1 in 100 businesses every single year. While it may be a simple mistake, there isn’t any leniency or grace for business owners who should “know better” in the eyes of the law. Tax law, especially. If you want to rest and earn revenue in peace, you’ll want to avoid any iota of tax evasion or avoidance. Here, we share how hiring a bookkeeper can keep you from trouble with the IRS.
The gravest mistake made by businesses each year come tax time is the blatant evading of paying them lawfully or fully. To assume a company will not be caught for inaccurate reporting of revenue or expenses is a risk that’s never worth taking. Of course, we are not talking about honest errors that business owners make. Evasion is what the Internal Revenue Service calls “voluntary, conscious, and intentional” conduct. It’s the difference between avoidance and evasion. For this reason, many people hire Virtual CFOs like us professionals at Two Sense Consulting so that the likelihood of audits and errors that put your business on the chopping block are rare if at all.
Tax Avoidance vs. Tax Evasion
Let’s clarify. Tax avoidance is legal. In fact, it’s one of the big secrets that some of the wealthiest people in the world share is one of their main catalysts behind their wealth – keeping as much as they can in their pockets. Tax avoidance is what taxpayers do (and Virtual CFOs help you do) to avoid paying more tax than necessary. You can avoid business and personal taxes by taking deductions and credits. Simply supporting these deductions and credits with IRS-approve paper trails and documents verify you are avoiding, not evading, taxes.
Another benefit that successful business owners use to avoid paying more than necessary is delaying taxes using IRAs, 401ks, and other tax-deferral methods. All of which can be discussed and implemented with one of us here at Two Sense. We love working with professionals to determine the best use of their cash flow and how it meets or, better yet, exceeds the goals you have for your business’ future finances.
Tax evasion, on the other hand, is not paying taxes by illegal methods.
“Willful” tax evasion can be either a sin of commission (intentionally doing something, like paying in cash) or a sin of omission (failing to include income or failing to file a tax return).
If the IRS, or the Tax Court, deem that an act by a taxpayer is “willful,” it can mean increased fines and penalties, including jail time.
Under-Reporting Business Income is a no-no. Hiring a bookkeeper can help keep records accurate and presentable.
You’ll want clean books to ensure you are not under-reporting income. All business income must be reported, including cash, and even barter, transactions. Another common way businesses under-report income is by keeping larger deposits under $10,000 since deposits of $10,000 or more are required to be reported to the IRS.
This shows up at times in payroll as well. Some businesses try to evade issues with payroll taxes by paying employees in cash. Paying in cash usually means no withholding for income taxes and FICA (Social Security and Medicare) taxes are paid. But, this too, can quickly catch up to you and be a very costly consequence.
Over Reporting Expenses can land you in hot water with the IRS.
Beyond under reporting income, the IRS is also on the lookout for businesses that over report expenses. Some of the most common ways businesses over-report expenses are via reports of personal travel expenses as business expenses. Or claiming personal vehicle miles as business miles. In addition to the above, some business owners will claim more-than-justified deductions. Like for home office space or begin claiming other personal supplies and home office supplies instead. Your best bet in avoiding any confusion is to have paper trails and to hire a bookkeeper. We will help keep your records clean and presentable in the event of an audit.
Living large is fine. But if it doesn’t equate to income, it can be investigated as tax fraud. Hiring a bookkeeper can help align your finances.
One of the ways many businesses are caught in tax fraud is that their lavish lifestyle doesn’t make sense with their reported income. See the 2014 bankruptcy case, Hawkins vs. The Franchise Tax Board of California, where the Hawkins family claimed they were bankrupt yet the IRS determined that “maintenance of a rich lifestyle after their living expenses exceeded their income constituted a willful attempt to evade taxes.”
There are even more willful acts that the IRS deems as reasons to fine or penalize business owners every year, such as, failure to collect or pay tax, failure to file a return or fraudulent statements in tax returns. If acts are deemed to be “willful,” the court may deem these acts as felonies or misdemeanors. This may result in heavy fines and imprisonment. Not to mention, the loss of business and reputation.
Hiring a bookkeeper can keep you from trouble with the IRS.
Tax penalties aside, on the other side of the coin, you can also be missing out on many opportunities to advance your business due to inaccurate records. For instance, if you are under reporting income, you’re missing out on valuable data that can help with more profit. Equally, if you or your staff are over reporting expenses, you are missing info that can be (and must be) reconciled so you can make educated decisions for the direction of your business with numbers that are true.
For these reasons, it is vital that your bookkeeping records are accurate. From payroll and taxes to expenses and income, it all needs to be accurate and easily presented. Any business can make a legitimate mistake. But remember that ignorance of the law is no excuse. A business owner has an obligation to know—and abide by—the law, or face the consequences. If this is outside your wheelhouse, or you want help getting your books reviewed, contact us for a free consultation.
