Taxes issues and tax compliance are two terms that often give individuals and companies anxiety. Taxes can be complicated, and ensuring compliance can often be nerve-wracking. Overall, tax compliance refers to taxpayers’ – whether individuals or businesses – decisions to comply with state, federal, and international tax laws and regulations in a timely manner.
And while that statement seems fairly straightforward, taxes can quickly become complicated by factors such as where you live and where you do business. These factors determine which jurisdictions you have tax liabilities to and what laws are applicable. Taxes can also become further complicated when you have moved, either personally or as a business location, recently.
Compounding the complexity of compliance is the fact that tax laws frequently change, on both a state and federal level. So, the requirements you have faced previously may no longer apply. This means that if you aren’t up to date in your knowledge of tax laws and recent changes, you may face inadvertent non-compliance. And unfortunately, non-compliance can often mean facing stiff fines or penalties.
Tax Compliance Concerns for Businesses
In addition to personal tax compliance, businesses have many tax implications that they must factor in their processes to ensure compliance. An overview of the primary tax components for companies includes:
- Employer Identification Numbers (EIN): Most companies need to obtain an employer identification number. This number serves as your federal tax ID number, and having one ensures that you can comply with your business’s tax liability. Obtaining an EIN should be one of the first steps a company takes after registering a business.
- Income Tax: Like individuals, businesses are required to pay state and federal (and sometimes local) taxes on any income earned during the year. The structure of your business will determine what tax laws apply when filing your income taxes, including how you report profits and losses. Many businesses opt to pay their business income taxes quarterly to reduce the amount owed when filing their annual taxes. While compliance can be maintained with either method, it is important to be consistent to avoid any unexpected anomalies in your accounting records.
- Estimated Taxes: Estimated taxes is how businesses pay taxes on income that is not subject to withholding, such as income from self-employment, interest, and dividends. If you do not play for this, you may risk non-compliance.
- Charitable Donations: Businesses often receive a tax deduction for making charitable donations, and you can often deduct expenses related to the donation, such as travel and materials, when volunteering services. While not reporting this information may not necessarily be considered non-compliant, it may not reduce your tax burden as it should.
Some businesses in unique circumstances, such as those that have received disaster assistance, may have additional tax compliance concerns.
Ensuring Compliance
It can be difficult to ensure compliance in today’s tax environment, with all the competing and sometimes contradictory requirements. However, if you consider all of the aspects of compliance, you should be in good shape to avoid any unnecessary fines, penalties, or audits.
The aspects of compliance include:
- Deadlines: The IRS has different due dates for filings, deposits, and payments – especially tax withholdings from employee paychecks. It’s crucial that you understand the deadlines for all tax requirements to maintain compliance.
- Accuracy: Payments made to the IRS must be accurate. The price of underpaying can be incredibly high since the IRS is permitted to assess penalties plus interest when an underpayment occurs. And to collect the full amount owed, the IRS can garnish wages, levy bank accounts, and place liens on property held by the company. Deliberate underpayment can even result in criminal prosecution.
- Documents and Record-Keeping: Employers must be diligent with the documents they collect from any contractors they do business with and any new employees. Similarly, They must maintain accurate records to ensure that the correct information is provided to the IRS. These records are essential if the business goes through an audit or has a tax problem. They are often the documents that may be used to determine whether an error is deliberate or intentional.
- Filing: The annual tax filing date is April 15 to ensure compliance. However, many businesses may need an extension, and to receive one, they must fill out the correct forms for an extension request. Missing this one step can result in non-compliance and major fines.
This overview outlines just how complex tax compliance can be for businesses. In many instances, businesses opt to work with a consulting accounting specialist to ensure that they achieve and maintain compliance. These professionals have expertise in current laws and regulations, and can often help you explore ways to reduce your tax liability.