Meara Welch Browne, P.C. - Certified Public Accountants

The IRS strikes fear in the hearts of taxpayers. Tax goofs generally lead to a letter from the IRS, something most of us want to avoid. Avoiding mistakes can help you save money and reduce anxiety. Here are seven of the top tax mistakes businesses make, along with suggestions on how to avoid them.

1. Keeping Sloppy Records

The most common reason for missing deductions or losing them during an IRS audit is poor documentation. It is easy to forget all the deductible payments you make during the year, if you do not have the records you need to support the deduction. Computer programs, such as Quicken, help you track expenses and remember deductions. In addition to tracking the deductions, you also must keep (and be able to find) the appropriate documentation to support your deductions.

2. Failing to File Tax Returns

Even if you do not have the money to pay the taxes you owe, you should file your tax returns on time. The penalties for failing to file are much steeper than the penalties for paying late. Many times you can work with the IRS to get a temporary delay for paying or an installment payment plan for monthly payments.

3. Misclassifying Employees

Many businesses make the mistake of treating employees as independent contractors to avoid payroll taxes and fringe benefits, without following the rules for independent contractor treatment. This can be very costly since the penalties for misclassification are very high. The IRS recently has been focusing even more attention on this issue. If you are unsure of the rules, check with your advisers and the IRS Web site at www.irs.gov (search for IRS Summertime Tax Tip 2009-20). And, follow the rules.

4. Failing to Pay Payroll Taxes

Money you collect from employees for withholding taxes and Social Security taxes must be paid to the governmental agencies. Failing to pay these taxes is a big mistake, since the money belongs to the employee not the business. You may find yourself personally liable for these taxes even if your business is a corporation. If you do not pay the taxes, the IRS can take your bank account, your home and anything else they find to get those taxes paid. Be sure to reserve enough money to cover the payroll taxes when you pay the payroll.

5. Ignoring IRS letters

If you get a letter from the IRS (or any governmental agency for that matter), be sure to respond. Failing to do so can mean liens against your bank accounts or levies against your income sources. Handled promptly, most matters can be worked out with minimal amount of stress.

6. Not Taking Advantage of What the Law Offers You

The tax law is full of breaks just waiting to be taken. For example, if you have a net operating loss in 2009, you may have the choice to apply such losses against income in earlier years and generate tax refunds. While the general rule allows the loss to be carried back just two years to 2007, special rules for 2009 may allow the business to carry the loss back to 2007, 2006, 2005 or even 2004. Additionally, even if you do not have a net operating loss, if you expect a refund for 2009, you may be eligible to apply for a “quickie refund” using tax form 4466. You can generate significant savings by taking advantage of what the law legally offers.

7. Failing to Look to the Past, Present and Future.

The tax law is constantly changing. Courts are deciding cases that affect income and deductions claimed on returns years ago. The IRS constantly announces changes affecting you and your business. Tax law changes can present opportunities to reduce taxes currently and in the future, and even opportunities to recover taxes you paid in the past.

It’s never too late to start doing tax planning.

Julie A. Welch, CPA, CFP is the Director of Tax Services at Meara Welch Browne, P.C. and co-author of 101 Tax Saving Ideas. julie@Meara.com// (816) 561-6868

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