Every business is required to file tax returns and make payments on income at the state and federal level. While each organization has its own requirements, ignorance of the rules is not an excuse for non-compliance.
Not only is it vital that a company dedicate resources to federal tax compliance, it is also costly. Since tax rules tend to change frequently, there is a high risk of mistakes as well as the potential to miss opportunities, both situations that could hurt your company's bottom line.
Make sure you pay your taxes; otherwise you can get in a lot of trouble."
- Richard Nixon
The words and experience of our nation's 37th president are a testament to the fact that no one is above the law. Nixon underwent an audit for his 1968-1972 taxes, which determined that his unusually large charitable donations were not permissible. The IRS sent him a bill for an extra $476,431, which is the equivalent of roughly $2.5 million in today's dollars.
The IRS estimates that the annual tax gap - the difference between the taxes paid and the taxes owed - is about $458 billion. This number balloons to $587 billion when you add in international noncompliance. The biggest tax gap contributors? Schedule C filers, or small business owners, who are estimated to underreport income by up to 57%.
Despite contrary ideas, one of the top priorities of the IRS remains enforcement. There is a misconception that taxpayers, individuals and businesses, can get away with more because the IRS is operating with fewer resources than in the past. While the agency has fewer employees, it is doing more with less through technology and spends the most (39% of its budget) on enforcement.
What happens if your business isn't compliant with federal tax requirements? The IRS could shut down your business, but an event like this is rare. A more likely scenario is that the IRS will ask that you get into compliance as quickly as possible. This means that you file all past due returns and pay what you owe.
If you are unable to stop accruing payments due, known as "pyramiding," the IRS might take you to collections. This means garnishments and bank levies. In extreme cases, the agency could come into your business with a court order to seize assets. If this sounds unthinkable, it certainly is, but it happens.
Spokane-based Vandervert Construction was placed in receivership in Feb. 2018, listing one of its creditors on its bankruptcy filing as the IRS. Some tax compliance issues are due to poor management, while others to negligence and fraud. Two executives of Oregon-based Northwest Behavioral Healthcare were charged and sentenced to restitution last year for six years' worth of corporate tax evasion.
As your company grows, it's filing requirements are going to evolve. Likewise, the tax code in this country has scheduled changes, and there may also be some additions that are passed during the year. Staying up to date on these matters is not only your responsibility but also the best way to ensure the longevity and profitability of your business. Your finance leader should maintain open and ongoing communications with your tax expert throughout the year.
Do you have more questions? Let us know. We would be happy to introduce you to someone with the tax expertise you need.
