Business Tax Mistakes You Need to Know

When you’re busy running an enterprise, shifting gears and concentrating on your taxes can be challenging. With numerous and ever-changing forms, deadlines, and regulations to follow, it’s easy to slip up.

Despite the IRS’s stern reputation, they understand that taxpayers are only human. What’s important is to leverage expert guidance as much as possible to guard against avoidable blunders, acknowledge mistakes promptly, and take the necessary steps to correct them. As with many issues in business and life, demonstrating good faith is never a bad strategy.

Here are seven steps for identifying and responding to potential business tax mistakes.

1. Watch Out for Common Missteps

   Even if you’ve already filed, reviewing your tax return and checking for common and costly mistakes is not too late. According to the IRS newsroom, here’s what goes awry most often:

   • Improper separation of expenses: It can be easy to mix personal and business expenses, especially if you’re the sole proprietor, but deduct only legitimate business costs.
   • Arithmetic errors: The U.S. tax code is complex, but many filing mistakes come down to simple math. Make sure your figures add up (and consider using specialized tax software that does the figuring for you).
   • Missing paperwork: All extra forms must be attached, whether it’s a Schedule C on your 1040 or a Schedule K-1 on your 1120-S.

2. Double-Check Anything Questionable

   If you think you’ve spotted an error on your return, go back to the source of information to verify it. If you used a professional tax preparer, ask them to examine and explain the apparent discrepancy. You can also ask a preparer or accountant to review a self-prepared return. If you catch one mistake, it’s important to catch them all, since you’ll only want to amend your return once.

3. Don’t Panic

   Discovering an error on your business taxes can be stressful, but take a deep breath and assess the situation. The IRS doesn’t want to punish honest slipups – they want the money they’re owed. Again, communication is key.

   First, determine whether the error has resulted in underpayment or overpayment – minor errors that don’t affect tax liability, like a misspelled name or address, don’t necessarily need to be rectified with an amended return.

   If you did pay the wrong amount, the IRS’s automated systems may catch it and send you a notice with the amount due. But it’s usually in your best interest to take the initiative and carry on with the steps below.

4. Decide Who Will Fix the Error

   Suppose you used a professional tax preparer, and the mistake is theirs. In that case, they are likely responsible for correcting it at no additional charge to you, as well as for paying any resulting penalties. Consult your agreement with the preparer and seek independent legal advice if necessary.

5. File an Amended Tax Return

   Amending a tax return involves recalculating your tax liability, explaining the changes, and attaching supporting documentation. The form you or your preparer must provide to the IRS depends on your business’s legal structure:

   • Sole proprietors and single-member LLCs: File Form 1040-X (Amended U.S. Individual Income Tax Return) to amend a previously filed Form 1040.
   • General partnerships and multimember LLCs: File Form 1065-X (Amended Return or Administrative Adjustment Request) to amend a previously filed Form 1065.
   • S corporations: File a new Form 1120-S (U.S. Income Tax Return for an S Corporation) with “Amended return” checked in line H to amend a previously filed Form 1120.
   • C corporations: File a Form 1120-X (Amended U.S. Corporation Income Tax Return) to amend a previously filed Form 1120.

   Generally, you have three years after the date you filed your original return or two years after you paid the tax – whichever is later – to file an amended return. However, you should file as soon as possible (unless you’re amending to receive a larger refund, in which case you should wait until the original refund is received).

   Check current IRS rules to confirm this information and to see whether you can file electronically or must file by mail. Remember that the above covers only federal income taxes – you may need to amend your state or local tax returns as well.

6. Prepare to Pay

   If an incorrect return resulted in underpaying taxes, you should be ready to pay the balance owed, plus possible interest and penalties. However, the IRS may reduce or eliminate penalties in certain circumstances, including if you relied on the advice of a qualified tax professional. If the amount is manageable, make a lump-sum payment. If that’s not feasible, the IRS may offer you an installment plan, a reduced settlement, or a temporary collection delay.

7. Plan for Next Time

   If you’ve been through the experience of dealing with a tax filing mistake, at least you’ll have some valuable lessons to bring into the new tax year. If the error resulted from a last-minute rush to file, set aside more time to organize and review your financial records throughout the year and before tax deadlines.

   Another common cause of business tax mistakes is business owners going it alone. A self-reliant spirit is often an asset, but an accountant with experience serving small businesses could save you time, money, and liability. The IRS’s Directory of Federal Tax Return Preparers with Credentials and Select Qualifications can help you find experienced professionals in your area. Stay prepared, and learn more about Tax Tips for Business Owners here.