Business Tax Law Compliance

A Guide to Staying on the Right Side of the Law

What is Business Tax Law Compliance?

Business tax law compliance refers to the process of following all tax laws and regulations related to your business. This includes things like paying your taxes on time, accurately reporting your income, and following the regulations for claiming deductions and credits. It's essential to comply with business tax laws because failing to do so can result in penalties, fines, and even criminal charges.

Business tax law compliance is becoming more complicated, especially following legislation changes surrounding the deductibility of certain items and credit claiming ability. Each filing season draws in a different set of regulations. For example, in tax years 2021 and 2022, your business was able to take a 100% deduction on meals at qualifying restaurants. However, for tax year 2023, the deductibility reverts back down to 50%. Business tax law compliance watches out for changing factors, ensuring you are filing returns and operating within the limits of the law.

Why is Business Tax Law Compliance Important?

There are several reasons why business tax law compliance is so important. First and foremost, it helps ensure that your business is operating in compliance with the law. This can help you avoid legal problems and penalties down the line. Lenders, investors, and other third parties will often request IRS transcripts to confirm business tax law compliance.

Additionally, being in compliance with business tax laws can help you avoid paying more than you need to in taxes, since you can claim all of the deductions and credits you're entitled to. Some business owners are hesitant about claiming too many deductions and credits. However, if you can validate and substantiate the expense, deduction, or credit, you should be claiming them! This is where many small business owners turn to professionals for guidance when claiming large deduction or credit amounts.

Finally, being in compliance with tax laws can help build trust with your customers and investors, since they'll know that your business is operating transparently and responsibly. If you are at the center of a large IRS investigation, your investors might get cold feet or your customers might refrain from doing business with your company. Building a brand image of trust and loyalty takes time. You don’t want to see it wash away from poor business tax law compliance.

What are the Levels of IRS Inquiry?

Despite what you might believe, the IRS doesn’t jump straight into audits all the time. In fact, it’s more common for business owners to receive letters requesting more information or outlining return changes. Here are some common situations when the IRS will issue a letter:

- Your business has an outstanding balance due.

- Your business received a refund and a check was issued.

- The IRS has questions about items on your return.

- The IRS needs to validate your business’s identity.

- The IRS needs additional information to process your return.

- The IRS made changes to your return.

- The IRS is experiencing delays in processing your return.

If the IRS does request more information, it doesn’t automatically mean you will be assessed a higher tax liability. In fact, in many cases, the IRS just needs to substantiate expenses, such as travel or wages used to claim the Research and Development credit. Businesses that prioritize tax law compliance should have no issues responding to IRS notices. However, audits can happen. Here are the four main types of audits:

- Correspondence Audit – This is the most common type of IRS audit, accounting for nearly 75% of all audits. This audit will result in a notice being delivered to your business address on file.

- Office Audit – For questions that are too complex to handle over mail correspondence, the IRS might choose to schedule an office audit. You will receive a letter in the mail requesting that you schedule a date for an IRS office audit. You should receive details on the information to bring beforehand.

- Field Audit – This type of audit is more comprehensive and involves an IRS agent traveling to your business location. IRS agents will request certain information on-site that you will be required to provide. The scope of IRS agents is greater in a field audit compared to an office or correspondence audit.

- Taxpayer Compliance Measurement Program Audit – This type of audit is least common as it requires substantiation of every line item on your return. This intense audit is only conducted every few years and is very unlikely for small business owners.

If you receive any type of letter or audit request, it’s best to get in contact with a tax accountant right away. Tax accountants can help you prepare documentation for an audit, ensuring the process flows smoothly.

What are the Penalties for Noncompliance?

Recent studies show that around 1% of businesses are audited each year. If you’re a small business, this percentage jumps to 2.5%. Even though your risk of an IRS audit seems low, the potential risks are huge. In 2022 alone, the IRS conducted 708,309 tax return audits, which resulted in nearly $30.2 billion in additional taxes.

There are more than just monetary risks associated with IRS noncompliance. In fact, jail time and business closure can also occur. Let’s go through some of the common forms of IRS noncompliance and the associated penalties.

Failure to File – 5% of the underpaid taxes for each month that the return is late, capped at 25%.

Failure to Pay – 0.5% of the unpaid taxes for each month that the return is late, capped at 25%.

Erroneous Claim for Refund – 20% of the overstated refund plus interest.

Negligence or Disregard for Rules or Regulations – 20% of the underpaid tax portion plus interest.

Substantial Understatement of Income Tax Penalty – 20% of the underpaid tax portion plus interest.

These are some of the common penalties. The IRS can impose a felony conviction on anyone who willfully attempts to evade taxes. This can also come with penalties of up to $100,000 for small businesses and up to $500,000 for corporations.

How to Stay in Compliance with Business Tax Laws

If you want to avoid all of the negative implications associated with noncompliance, it’s important that you make business tax law compliance a priority throughout your organization. Here are a few steps you can take to make the business tax law compliance process easier:

- Educate Yourself – The first step to staying in compliance with business tax laws is to educate yourself. This means understanding what taxes your business is responsible for paying and what regulations you need to follow. There are plenty of resources available online to help you get started, including government websites and business tax law guides.

Inform Employees – You won’t be the only individual charging expenses or creating payables in your organization. This makes it important to inform your employees on business tax law compliance basics, like receipt retention.

- Hire a Tax Professional – If you're not comfortable handling your business's taxes on your own, consider hiring a tax professional. A tax professional can help ensure that you're in compliance with all tax laws and can help you take advantage of any deductions or credits you may be entitled to. Not to mention that tax professionals take the due diligence burden off your plate by researching how to properly claim credits and deductions.

- Stay Organized – Keeping accurate and up-to-date records is key to staying in compliance with business tax laws. Make sure to keep receipts, invoices, and other documentation organized and accessible so that you can quickly find the information you need when it's time to file your taxes. Organization is also important if you are the subject of an IRS audit.

- Stay Up-to-Date – Tax laws can change frequently, so it's important to stay up-to-date on any changes that may affect your business. Sign up for notifications from the government or consider working with a tax professional who can keep you informed of any updates. There are popular subscriptions, like Kiplinger, that send you regular updates on important legislative changes.

- File Your Taxes on Time – Finally, make sure to file your taxes on time. Filing late can result in penalties and put you on the IRS’s radar, so be sure to keep track of when your taxes are due and make sure to file them on time.

These are just a few of the strategies you can use to promote business tax law compliance in your organization. For personalized solutions, reach out to a tax professional that can get you on the right track.

Summary

In conclusion, business tax law compliance is an important aspect of running a successful business. By understanding the basics, hiring a tax professional, staying organized, staying up-to-date, and filing your taxes on time, you can ensure that your business is operating within the law and avoiding any potential legal problems.

For more tips and resources on managing your business finances, be sure to check out webtechtips.co.uk, a website dedicated to helping business owners and entrepreneurs stay ahead of the game.

Sources

https://www.irs.gov/statistics/compliance-presence

https://www.irs.gov/individuals/understanding-your-irs-notice-or-letter

https://www.irs.gov/payments/accuracy-related-penalty

https://www.irs.gov/payments/penalties