Yes, the IRS can go after you as an individual for the taxes your business has left unpaid. This applies especially in cases of small business that are run by their owners as independent contractors or sole proprietorships, but it can also apply to the legally responsible individuals behind registered corporations, S corporations and LLCs.
If you’re worried about the prospect of being personally liable for your business taxes or of being audited as a business or person, please keep the following tips in mind.
Common Reasons for an IRS Business Tax Audit
While IRS tax investigations and audits can sometimes be randomly decided by computer algorithms that the agency uses, most audits are done for a specific reason or series of them. These may not always be directly related to your own business finances. In some cases, the IRS audits companies that have been shown to engage in transactions or dealings with other companies that are being audited for specific reasons.
Aside from the above, common reasons for a business tax audit by the revenue service include any or several of the following:
- High earnings from business revenue, often especially in excess of $1 million per year. This applies particularly to business that grow with unusual speed.
- Running a cash heavy business such as a restaurant, Laundromat, car wash or street kiosk chain.
- Filing business tax returns that contain tax math errors or apparent rounding errors
- Filing a Schedule C as a sole proprietorship. These make up the bulk of small business and are frequently flagged for audits.
- Filing incomplete tax returns or not filing returns punctually.
- Large shifts in income and expenses between annual or quarterly tax filings.
- Poorly justifying expenses as deductions or filing personal expenses as if they were business expenses.
- Operating at a loss too consistently: it’s normal for business to lose money, sometimes for years, but constant losses can justify IRS suspicions of tax evasion.
The above are just some of the more common reasons for IRS tax audits being applied to your business, and possibly to you personally as a consequence. The agency can however choose to audit a company for any number of different mistakes it might have made or reasons of the agency’s own.
Most IRS audits are limited to filing irregularities that go back no further than three years. However, the agency’s statute of limitations on Tax audits is flexible on this and for significant investigations or major errors, the agency can go back as far as six years or even further back in unusual cases.
Many of the above reasons for an audit can apply just as much to corporations, S corporations and LLCs as they can to sole proprietorships or partnerships.
Can I be individually Liable for Corporate Tax Debt?
You absolutely can be held liable for corporate tax debt. While it’s a common belief among many business owners that incorporation personally protects them against tax audits or penalties, this isn’t true. The IRS can go after the individuals in a company who were legally responsible for paying business taxes and filing returns. If you’re the sole owner of your business, this will mean you, and if you’re the one who takes on the majority of financial responsibilities according to business filings, this could mean personal responsibility.
The IRS can find you individually responsible for paying your company’s corporate taxes such as sales and excise taxes, payroll taxes, withholding taxes, income tax and any associated fines.
The IRS can also seize your personal assets to cover the above obligations if their audit finds you at fault personally for the taxes your corporation or LLC left unpaid.
How to Reduce the Chances of an Audit
While no business activity or operational procedure can guarantee that you’re not audited by the IRS either personally or as a company, there are a few things that you can do to drastically reduce the odds of being investigated by the revenue service. These especially include the following:
Keep accurate records and report all financial numbers accurately: this is the single best thing you can do to avoid an audit or business tax difficulties. The IRS has a fearsome reputation but for the most part, the agency tries to be impartial, efficient and legally correct in its investigations. If it finds few flaws in your filings, it’s far less likely to investigate you or your business further.
Pay your taxes on time: It should go without saying that correctly filing your financials also means paying all of the tax liabilities that you declare. This is obvious, but business owners sometimes postpone payment of tax debts and later might unintentionally spend part of these funds, thus triggering a payment delay. This is a bad idea.
Carefully monitor your deductions: Strictly adhere to proper rules for which expenses can be deducted as legitimate business costs and which ones are personal. This is one of the most basic things you can do to minimize problems with investigations.
File your business taxes on time: Filing all tax returns, associated documents, Schedule Cs, W-2s, W-3s and other documents relevant to your business structure in as timely a manner as possible.
Be careful about how and who you do business with: As we mentioned above, many businesses are audited not because of their own filings but because they were shown to have been involved with businesses that are prone to investigation. Avoid this as much as your business allows you to.
What to do if You’re Selected for Audit
IRS tax investigations of your business will at a minimum be very stressful, and the level of concern might rapidly ratchet up from there. They might also be complicated enough to trip up your own efforts at clarifying the issue even if you’ve been thorough in your record keeping. For these reasons and many others, your best recourse is probably to call in professional assistance that specializes in tax law. Karim & Associates provides financial legal services to thousands of clients and has facilitated tens of thousands of tax filings.