Hiking is a rewarding activity, partly because of the satisfaction you get from overcoming a challenge or difficult situation. Maybe it’s getting past a mostly uphill section of the trail or surviving some unexpected bad weather. Whatever your challenge, it becomes harder to deal with if your equipment is not in good shape or otherwise lacking.
This is a little bit like dealing with business tax issues. Sure, you may be able to handle it on your own. However, it can be a lot easier, less painful, and less stressful if you have the help of a tax professional, such as one from Highland Tax Resolution.
Getting Through an Audit With Messy Business Records
For many businesses, maintaining complete, accurate financial records is a significant challenge and can lead to an increased risk of an audit by the IRS. If your business has disorganized financial records and you’re facing an audit, here are ways to help navigate this challenging time.
Taking Things One Step at a Time
- Start by reviewing the audit scope the IRS has provided—are they asking a few specific questions, or is the audit more comprehensive?
- Next, gather the records and information needed to respond to the IRS. As you do so, note changes you should make to your recordkeeping methods going forward to reduce the likelihood of another audit.
- Assemble the records that you do have and organize them by category, for example, revenues, expenses, payment records for employees and independent contractors, etc.
- Identify the records that are missing. For example, if you reported business meal expenses of $1,250 but only have receipts for $750, you need to find a way to document $500 for this type of expense.
- For each instance of a missing record, provide secondary documentation. For example, imagine you misplaced the receipts for two of the monthly lunches you had with a client. You can provide records from your calendar showing that your lunches were scheduled every month and credit card statements showing restaurant charges on the dates for which receipts are missing. If no secondary documentation is available, make a reasonable estimate that is compliant with IRS guidelines and consistent with other items you have in the same category.
During the audit, the IRS will determine whether the documentation you provided for each issue raised is acceptable. They may disallow deductions, assess a higher tax liability, impose a penalty for inadequate recordkeeping, or charge interest on any additional taxes owed.
Common Problems When Switching Payroll Systems
Changing to a new payroll company is no small feat. Despite being careful, here are some mistakes that can sometimes still occur.
Double Reporting of Wages
One responsibility of a payroll company is to file Quarterly Federal Tax Returns (Forms 941) or W-2s. Sometimes, during the transition, the new company may file these forms with the IRS without realizing they were already filed. When the IRS receives these filings twice, it can cause confusion. The IRS can consider your business as underpaid or overreported, triggering audits and penalty fees. Before your new payroll company files anything with the IRS, ensure they have accurate documentation as to what has been filed with the IRS and when.
Missing or Late Tax Payments
It’s possible that during setup, payroll taxes (such as income tax withholding, social security, and Medicare) missed depositing deadlines. If a payment is missed or delayed, the IRS may impose late fees and charge interest on the payment.
Failure to File Final Returns with the Old Provider
During the switch, it’s essential to know that your old payroll company must file final returns and that all taxes are settled before the switch. If your last tax company doesn’t have this sorted before the transition, it could lead to unfiled returns.
Lost Tax Payment Records
Your previous company must provide the new payroll company with all of your previous payroll tax records. The new company needs this information to accurately understand your business’ previous filings and tax obligations. Without this information, the new company could make filings that are inconsistent with previous IRS filings, causing the IRS to audit the business.
The IRS Wants to Seize Essential Business Property
If you get too far behind on your taxes, the IRS could file a Notice of Federal Levy to seize property or equipment essential to your business. Here are some options for you to consider in this situation.
What Led to the Levy?
Initially, the IRS sends an IRS Notice and Demand for Payment based on its assessment of the taxes your business owes. If you fail to respond, the IRS sends up to four additional notices, followed by a Notice of Federal Tax Lien; a lien is a claim against your business’s property, which can damage its credit. If your business still doesn’t pay, the IRS sends a Final Notice of Intent to Levy and a Notice of Right to a Hearing at least thirty days before issuing a levy. The exact timing and number of notices will vary depending on the individual case.
Responding to a Levy Notice
If you receive a levy notice, you need to respond promptly and clearly about your intent to resolve the issue. If you can’t pay the tax debt in full immediately, options include asking that an IRS manager review the case or requesting a hearing. Here are examples of what may occur in either case:
- You negotiate an installment agreement for the payments.
- You show evidence that releasing the levy will help the IRS collect the tax.
- You show that the levy creates significant economic hardship.
- The IRS grants an extension to pay your tax debt.
- You settle your business’s tax debt for less than the amount owed.
Tax issues can be problematic for any business. However, facing this challenge with especially messy or complicated tax issues can make things even more difficult. If you feel lost, the Highland Tax Group will be more than happy to guide you.