Did you know that even though Al Capone was never convicted for any of his crimes, he was sentenced to eleven years in prison for tax evasion? This tells a lot about the slim possibility of getting away with this violation. So, if you think you won’t fall under the IRS radar, think it twice! This is especially true if you run a small business: entrepreneurs are twice as likely to be audited by the IRS as compared to individual taxpayers.
As a small business owner, your profits may be low and you aren’t sure whether you would be able to pay taxes: you wrongly think skipping taxes for just one year won’t do any harm. Or you may decide not to file your return because tax deadlines have caught up with you, or you simply don’t know where to go to file taxes. You may be even considering tweaking your return a little bit to get more money back. This isn’t the brightest idea either.
Instead, get familiar with tax regulations and the consequences of tax evasion, and more importantly, learn how to tackle this problem successfully, exploring all the options and choosing the best possible solution.
What is tax evasion?
Tax evasion is defined as the act of intentionally avoiding paying what you are aware you owe to the government or refusing to file a tax return. Besides, tax fraud, or in other words, deliberately lying in order to receive a bigger refund, is also a form of tax evasion.
There are various activities that fall under the umbrella of tax evasion. Some of them include:
- Claiming false deductions, or deducting more than what you really spent
- Lying on your tax return
- Claiming credits you aren’t actually entitled to
- Failing to report offshore bank accounts and/or foreign income
- Failing to report all of your income (including tips and cash)
- Claiming personal expenses as business expenses
- Pretending to transfer money in order to write it off — although you didn’t complete the transfer
- Claiming extra exemptions
- Writing off losses which you were reimbursed for by your insurance company
- Writing off losses (theft, business, property, etc.) that didn’t take place
- Using dishonest accounting practices to make it appear that you have greater expenses or lower income than you do
- Claiming expenses that you have already been reimbursed for
- Putting your assets in somebody else’s name to avoid paying taxes
These actions may seem tempting as a quick fix to your tax problems, but they are actually just the beginning of the road that becomes uglier and uglier.
Reasons why you shouldn’t evade taxes
Here is what happens if you don’t pay taxes or lie on your tax return. When you commit tax evasion you could…
- Receive notices from the IRS giving you the opportunity to correct your mistakes. The IRS usually sends you a warning before taking any drastic measures.
- Get audited by the IRS. An IRS audit can become a costly and time-intensive process that includes an extensive review of your financial records and taxes, as well as in-person interviews. Therefore, you should probably get a professional representative which is an additional unexpected cost. Not to mention how this can affect your business.
- Lose your chances to get legal status if you’re an undocumented immigrant. If the reason you’re not filing taxes is that you’re an undocumented immigrant and you’re afraid your tax return will draw the attention of the authorities, there’s no need to worry. The IRS and the USCIS (U.S. Citizenship and Immigration Services) are two separated entities. Actually, by filing your taxes and comply with the law you’ll increase your chances to eventually acquire your nationality if the situation arises: a provable history of paying taxes is considered as one way to show good faith, should such a bill ever pass. If you don’t have an SSN, all you have to do is applying for an ITIN (Individual Taxpayer Identification Number). You can apply for this number and submit your taxes simultaneously. Get here all the information you need about how to apply for an ITIN and file your taxes.
- Receive heavy penalty fees for not doing your taxes. If you willfully fail to file your taxes, you can expect fines of up to $100,000, while making a false statement brings up to $250,000 in fines.
- Face criminal charges or serve jail time. This is usually the case of a extreme tax evasion, when a lot of income is being hidden from the IRS or when there is a pattern of misconduct. It’s considered as an attempt to defraud the government, and that’s why it receives such a severe punishment.
- Miss out loans or mortgages. When banks and mortgage companies review your loan application, they ask for copies of your tax returns to verify your total income. If you misinformed about your revenue to lower your tax liability, your total income won’t be on the return. As a result, you might be denied for the loan which can hurt your financial future.
- Pay high interests. When you fail to pay your debts, you will probably face paying the penalty and interest in addition.
- Forfeit your refund. The IRS won’t give back until you settle your dues. For instance, if you didn’t file taxes in 2017 and the IRS is investigating you, but you managed to file for 2018 and are due to a refund, you probably won’t see that money.
- Give up Social Security. The IRS has the power to attack some of your assets after notifying you adequately. One such asset they can seize is your Social Security.
- Receive a federal tax lien: a claim the IRS makes to your property. Basically, they are allowed to seize your home or business.
- Lower your credit score. Unpaid debts reflect negatively on your credits score as well. A low credit score can be a reason for not getting a loan that could provide necessary finance funds.
- Receive a summons: it’s a legal process that requires you to meet with an IRS officer, to show relevant documents and records, and maybe even to testify. This usually happens when the IRS has difficulties sorting out the taxes you owe.
- Declare bankruptcy. This usually occurs when you can’t pay your taxes and you can’t afford to pay your mortgage or expenses. It’s one of the worst-case scenarios.
And there is more!
The consequences of tax evasion and under-reporting your business income listed above are not the only ones. You could also miss great business opportunities. The income your company reports is an indication of how healthy and prosperous your business is. The more successful you are the more partners you can attract to your organization. The most obvious one is a bank or financing partner. If you under-report your profits, you limit yourself to more expensive or less favorable loan terms.
Also, the city or local governments are actively looking for minority-owned suppliers. These contacts can be very beneficial, but you need to prove to the government or a potentially large client that your business is financially healthy enough to take on the contract. Bottom-line: you’re literally tying a chain to your business when you evade taxes or you report less income than what you actually have.
What to do if you can’t pay taxes?
There’s no excuse not to do your duty. If you feel you won’t be able to pay your dues, still file your tax return, and then contact the IRS. This may seem counterproductive, but the agency is more beneficial to entrepreneurs who admit they are off track and who are willing to work things out than to the ones who are deliberately and consciously ignoring their duties.
Luckily for you, the IRS offers an Installment Agreement (AI) which you can use to suggest a favorable and reasonable repayment schedule. To request an AI just use Form 9465 or the Online Payment Agreement Application.
Another option is to suggest a settlement, offering to pay as much as you can, and the IRS forgives you the rest. However, this is difficult because you need to hire a tax attorney, which is crucial in such situations.
Have in mind that there is Taxpayer Advocate Service, an independent organization within the IRS that you can contact and ask for help when it comes to tax penalties and tax evasion. Their phone numbers are 1-877-777-4778 or 1-800-829-4059.
Paying taxes is a civic duty of all residents of the US, but more importantly, it is a law requirement. Therefore, tax evasion is a serious offense. If you don’t perform your obligatory duty and pay taxes, then the government agency in charge of taxes (IRS) will demand you to pay your taxes, or you will face penalties, like fines or even going to jail.
Therefore, learn how to file taxes for your small business and inform yourself where to go to file taxes if you need assistance so that you don’t fall into a vicious circle of never-ending payments.
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