Even the most successful small business is no match for the mighty bureaucracy of the IRS. Due to a tax law passed by Congress in 2004 to keep major corporations from creating tax shelters, small businesses who make honest mistakes on their taxes, pension or health care policies can be fined $200,000, if not more. Business owner Orman Wilson of Houston, proprietor of 19 incredibly successful coin-operated car washes around the metropolitan area, tried to set up a pension plan for himself and his six employees. Due to the fact the plan was set up incorrectly by an certified public accountant and a number of advisors, Wilson was given a tax bill of $250,000, plus special penalties totaling $1.2 million. That amount wiped Wilson out and he’s not alone. A number of other small businesses owned by middle class families have suffered the same sentence, not because they were attempting to swindle the government through a complex financial tax shelter, but because they made a innocent mistake in their paperwork.

While Senate Finance Committee leaders Charles Grassley and Max Baucus have issued statements about changing the laws surrounding these tax penalties, new laws have yet to appear and the IRS is about to start collecting on these penalties after the September 30 moratorium is lifted. As bureaucracy battles bureaucracy, small business owners should pay close attention when filing their taxes, especially until the law is fixed to only go after the large corporations guilty of creating these tax shelters. Business owners should also be mindful of the following:

  • The IRS will fine any business up to 20 percent for inaccuracies or careless reporting of income by substantially understating what you or your company owed in taxes. Most of the time, small businesses are just making honest mistakes or their accountant didn’t do their job correctly. Rather than risking a fine and having to fire your trusted accountant, consider hiring a payroll services company like Paycor who specializes in keeping everything correct and reporting accurately to the IRS. If for some reason the IRS thinks you have actually withheld reporting or paying taxes for other reasons than an honest mistake, your business can be fined up to 75 percent of the amount of taxes you owe on top of the taxes you owe for civil fraud. Some businesses and individuals are also charged with tax fraud, but this is extremely rare.
  • File your taxes on time. Filing late or failing to pay on time will sometimes cost small business extra money. It also raises a red flag to the IRS, making them look into auditing you and your business. If you don’t want the extra charges or the pangs of an IRS audit, make sure you turn in all your taxes on time. Small business owners have a number of tax payments to keep track of, the paperwork and deadlines for which can be overwhelming. If you’re experiencing difficulty, be sure to enlist the help of a tax professional or trusted advisor who can help you get everything turned in correctly and on time.
  • Underpaying is another major problem for small businesses and often costs them tremendous amounts of money in the long run. If this occurs, the IRS will not only make the business owner pay the full amount but also impose costly penalties in every quarter of the following year. This is often due to bad accounting work as well, unless more than an honest mistake was made.

As with avoiding inaccuracies in the tax return in the first place, it’s probably in a small business’s best interest to hire a payroll company or an accounting firm to do everything tax-related for them. Considering how much is at stake if a mistake is made, it’s worth paying a little extra to these companies than to the government.