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What Taxes Does My Small Business Have to Pay?
Small business owners may have to pay additional taxes on top of income taxes depending on if you have employees, how you classify your business, and your business expenses.
The various taxes your small business may have to pay include:
- Income taxes
- Employment taxes
- Estimated Quarterly Taxes
- Self-employment taxes
Everyone who is either a 1099 worker or a W-2 employee who made any type of income files income taxes for the previous year. This rule also applies to small businesses because the government uses income taxes to fund federal programs. Failure to pay income taxes will lead to fines, penalties, and potentially jail time.
Determining your small business tax rate depends on the amount of income you receive, and which tax bracket you then fall into. The seven brackets are: 10%, 12%, 22% 24% 32% 35% and 37%.
Remember that there are federal income taxes and state income taxes. All states require state income taxes, with the exception of Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
The Internal Revenue Service (IRS) offers a six-month extension for business owners who need extra time to file their taxes. Although IRS may grant an extension, that doesn’t always mean your business won’t be subject to late-filing penalties. Use the extension only when necessary.
Businesses with employees are required to pay various employment taxes:
- Federal Income Taxes – taxes withheld from the employee’s wages using their W-4 and withholding tables. Business owners/employers deposit withholdings.
- Federal Unemployment Tax – taxes only paid by the employer.
- Social Security & Medicare Tax – the employee has this amount withheld from their paystub and the employer must match the amount withheld.
Estimated Quarterly Taxes
For most employees, estimated taxes are automatically withheld, however, this is not the case for small businesses. Each quarter, as your business earns money, you’re expected to pay estimated taxes. Use IRS form 1040-ES to find estimated quarterly taxes.
Those who do not file quarterly taxes are subject to fines, penalties, and interest.
Quarterly taxes are due on the same day each year with the exception of weekends – in which case the due date falls on the following business day. 2022’s quarterly taxes are due on:
- April 18th
- June 15th
- September 15th
- January 15th
Self Employment Taxes
Self-employment taxes are used for business owners who are, self-employed. Those who run their own businesses don’t automatically have taxes withdrawn from their paycheck.
Only those who meet one of the following criteria must pay the self-employment tax:
- Net earnings are $400 or more
- Earnings from a church or church-controlled organization exceeded $108.27.
Taxes and your Business Structure
Each type of business structure has different tax implications. Understanding your specific business structure and the tax payments associated with it is essential to filing your taxes properly.
An unincorporated business, with one sole owner, is automatically classified as a sole proprietor. In the U.S over 23 million businesses are considered sole proprietorships. As a sole proprietor, you assume all financial and legal obligations of your business.
Filing taxes as a sole proprietor is fairly simple. You report your business income and losses on your personal tax return through a Schedule C, therefore your company profits are added to the income on your personal tax return.
This business structure also allows you to deduct 20% of your business’s net income from your taxable income, which, in turn, reduces your tax liability.
If your business is structured as an S Corporation, you limit the risk of double taxation by passing income to shareholders. These shareholders report the business income, expenses, losses, and deductions on their tax returns.
As one of the most common business structures for small businesses, it allows for similar advantages to a traditional corporation, with additional tax flexibility.
This business structure is also eligible to make use of the 20% tax deduction mentioned above.
This business structure, also known as a traditional corporation, is made up of a shareholder, board of governors, officers, directors, and employees. C corps are the only business type that pays taxes on the company level. Shareholders of these corporations must pay personal taxes on dividends.
Limited Liability Companies (LLC)
An LLC is one of the most popular business structures among small business owners. LLCs are only taxed on the individual level. Members of the LLC only pay taxes on the individual level, similar to an S Corp or sole proprietorship.
If you have a multiple-member LLC, you have the choice to be taxed as a partnership or as a C Corp. If you choose to be taxed as a partnership, the members of the LLC will report their share of the business income in their personal tax returns.
When are Small Business Taxes Due?
As mentioned above, small businesses owe estimated taxes quarterly. Tax days that fall on a holiday or a weekend will push until the next business day. Merchant Maverick provides a chart, seen below, of when taxes are typically due annually.
How Do I File My Small Business Taxes?
When filing business taxes, you can file them yourself, or use a trusted accountant or CPA. The benefit of working with a tax professional is that their experience will help you file the right forms, and help you avoid unnecessary fines and penalties.
When filing your return, you can use electronic resources to help you organize and file. Let’s break down the different steps to file your small business taxes.
- Know when your taxes are due – deadlines are not flexible
- Gather business tax information: business name, address, EIN, financial reports, expense records deduction records, payroll documentation
- Organize tax deductions (more below)
- Calculate taxes owed
- File all of the appropriate tax forms for your business
- Double-check your file yourself or with an accountant
Click here for a list of IRS’s most popular tax forms, and their associated instructions.
Small Business Tax Deduction Tips
Taking advantage of tax deduction opportunities can help your business save money. It can help lower tax debt to reallocate resources into growing your business.
In 2018, the Qualified Business Income Tax Deduction went into effect. This tax reform allows small business owners to deduct up to 20% of their total income if they meet certain requirements laid out by IRS.
Various deductions small businesses can claim include:
- Home office deductions
- Startup expenses
- Travel expenses
- Employee salaries, wages and benefits
- Charitable donations
- And more
Will My Taxes Trigger an audit?
There is no guarantee that your business tax files will or will not trigger an audit by IRS. However, they are keeping a more watchful eye this season as the government searches for funding for the remainder of the current administration’s proposed Build Back Better Bill.
- Failure to report income on a W-2 or 1099 form
- Failure to report all of the income received by your business (under-reporting)
- Amending a tax return to claim a refund
- Businesses who report losses for more than a year
- Businesses that are a hobby instead of a business
- Filing honest mistakes
- Using 501c write-offs
- High business expenses
What happens if I don’t pay my business taxes?
Failure to pay business taxes will result in fines, penalties, and potentially jail time. If your business fails to pay taxes due, IRS will send a notice in the mail that outlines the payment due date, and response due date. Ignoring their notices can increase fines and penalties. Click here for our full guide on do’s and don’ts when receiving an IRS notice.
Late penalties vary, but typically the fees include a 10-25% penalty applied to each month taxes are not paid. Oftentimes, there is an additional $135 penalty with interest.
In certain circumstances, your business could be subject to the Federal Payment Levy program that authorizes the government to suspend certain benefits from businesses (such as military retirement benefits, select federal salaries, and more).
The agency will assess the penalty on a case-by-case basis. In some instances, the government will issue a business tax lien as repayment for taxes owed.
If the government agency decides your business purposefully evaded paying taxes through fraudulent actions like falsifying deductions, this can lead to criminal exposure and criminal charges. This offense can lead to $10,000 in fines and up to five years in prison. At times, both can be implemented.
What is a business tax lien?
A tax lien happens when the government legally claims your property because you did not pay tax debts. IRS will issue your liability and will send a Notice and Demand for Payment. Failure to pay the full amount by the due date will trigger the government to notify creditors that the government now has the legal right to your property. The property the government can claim includes:
- Personal property
- Real estate
- Financial assets
- Intellectual property
Paying your debt in full within 30 days of the notice is the best way to remove a tax lien. Other ways to reduce the impact of a lien include:
- A discharge of property: This removes the lien from a specific property.
- Withdrawal: This removes the public Notice of Federal Tax Lien.
- Subordination: This allows creditors to move ahead of the IRS.
Can I sell my business with a tax lien?
Yes, you can sell your business with a tax lien. IRS will post a public “Notice of Federal Tax Lien,” so all of your creditors will know there is a lien on your business when you are trying to sell.
As of April 2018, the three major credit reporting agencies have agreed not to include federal tax liens on credit reports.
You can sell a property or other business asset with an attached lien as long as the debt is paid. Ideally, your business equity is worth more than what is owed to the government. In this scenario, you can fully satisfy the tax lien with profits from the sale and still pocket a profit.
In some cases, the sale of business assets does not necessarily have to fulfill the entire lien in order to be sold. IRS will release a lien to allow a sale as long as they receive a portion of the remaining equity after senior debts (such as a mortgage), commissions, and other debts are paid.
Selling a property with a lien will require extensive communication with IRS.
Follow these tips for selling a business asset with a tax lien:
- Assess the amount of the tax lien
- If you are not on an installment plan, set one up
- Submit all required paperwork to IRS
- Read IRS Publication 783 to see examples of different types of discharges
- Determine if your business sale will fully satisfy the tax debt
- Consider filing for subordination
- Never try to circumvent your tax lien
- Do not submit incomplete or inaccurate information to IRS
- Be sure to submit information for anyone who is representing you
For more tips on what to look out for this 2022 tax season, read our article here.
When determining whether your workers should be classified as employees or independent contractors, it’s critical to ensure that you are closely following the Employment Development Department’s (EDD) strict guidelines.
On the simplest level, proper classification is determined by whether or not the principal, or employer, holds the “right of control.”
What is “Right of Control?”
Right of control is determined by who holds the “right to control the manner and means” by which work is performed.
A corporate administrative assistant, for example, reports directly to an executive who manages their work. Likely they work a classic Monday through Friday, 9 to 5 schedule. When they want to go on vacation, they have to request time off or let their manager know in advance.
Now consider an app-based rideshare driver. When they’re available to work, they log into the app and begin work. Perhaps after a couple of hours, they decide they need a break, they disable the app and log off for a break. While they are required to abide by the rules and regulations set in place by the company that they work for, their hours and responsibilities are not deliberately determined by the company overall.
How does EDD determine 1099 status?
EDD utilizes the right of control as an initial way to classify workers. They take things one step further by providing a worksheet that employers can utilize to help clarify discrepancies.
Since January 2020 the new ABCs of worker classification has been implemented to try to simplify the process of determining worker classification. Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Since the passing of the AB_5 gig worker bill, there have been multiple rounds of exceptions, exclusions, and widespread confusion about how the rules affect real-life business scenarios. In cases of confusion, the original 13 point Borello test is still the fallback.
The questions posed in the EDD Borello criteria include the following 13 elements to provide additional support in determining workers’ proper classification. They include the following:
- Do you instruct or supervise the person while he or she is working?
- Can the worker quit or be discharged (fired) at any time?
- Is the work being performed part of your regular business?
- Does the worker have a separately established business?
- Is the worker free to make business decisions that affect his or her ability to profit from the work?
- Does the individual have a substantial investment in their job which would subject him or her to the financial risk of loss?
- Do you have employees who do the same type of work?
- Do you furnish the tools, equipment, or supplies used to perform the work?
- Is the work considered unskilled or semi-skilled labor?
- Do you provide training for the worker?
- Is the worker paid a fixed salary, an hourly wage, or based on a piece-rate basis?
- Did the worker previously perform the same or similar services for you as an employee?
- Does the worker believe that he or she is an employee?
Answering “yes” to questions 1-3 would provide a strong indication that the worker is an employee. Answering “no” to questions 4-6 would indicate that a worker is not in business for themselves and would likely classify as an employee. Questions 7-13 may indicate important factors to be considered. While answering “yes” to any one of them may indicate that a worker should be classified as an employee, no single factor is enough to determine so independently.
The full worksheet provided by EDD provides further clarification on certain factors and circumstances. If completing the provided worksheet does not provide sufficient clarification for employers, EDD offers the ability to request a written ruling by completing a Determination of Employment Work Status.
In cases where EDD initiates a worker classification audit, employers can be required to retroactively prove that their workers were correctly classified at 1099 contractors vs W-2 employees. At Milikowsky Tax Law we are experts in EDD audit defense. Our team works with you to ensure that your audit does not spread to other areas, that EDD understands the scope and function of your unique business and that you are only liable for back fines and fees on those workers who are indisputably misclassified.
We have represented hundreds of businesses and individuals audited by EDD, CSLB, CFTB, and IRS. Our team is dedicated to ensuring you get the best result and that your audit does not permanently negatively impact your business or your life. Reach out to our team for more information.
Paying taxes is required for the workforce and for businesses. No one wants to pay more taxes than required, but purposefully avoiding these payments can open your business up to criminal tax liability. While there are legal loopholes to pay fewer taxes, often framed as tax avoidance, there are also serious offenses when you choose to evade paying your taxes.
There are different forms of tax manipulation, some of which are federal offenses and can land you in a criminal audit by IRS. IRS criminal audits can lead to hefty fines or worse–– prison time. With a 90% conviction rate, undergoing prosecution by IRS criminal is, indeed, a big deal. So what is the difference between legal avoidance or paying less, illegal tax evasion or paying nothing, and criminal tax evasion (fraud)? The intent is the biggest deciding factor when it comes to determining between fraud, evasion, and negligence.
What is Tax Fraud?
Tax fraud is, “an intentional wrongdoing, on the part of the taxpayer, with the specific purpose of evading a tax known or believed to be owing.”
A person or a business purposefully or intentionally manipulates information on a tax return to reduce or avoid the amount of taxes owed. Forms of tax fraud include:
- Claiming false deductions
- Claiming personal expenses as business expenses
- Using false Social Security numbers
- Underreporting income
- Failure to report income
- Neglecting reporting payroll taxes
Every year the government loses millions of dollars from tax fraud. The Internal Revenue Service (IRS) investigates these tax fraud cases to determine if the person or company under question intentionally avoided their taxes owed. Parties who are found guilty are required to pay fines, penalties or, in the case of criminal prosecution, serve prison time.
What is Tax Evasion?
Tax evasion is a branch of tax fraud. Committing tax evasion is, “using illegal means to avoid paying taxes.” There is still intentional concealment to avert paying taxes. Different forms of tax evasion include:
- False or improper claims
- Omitting or concealing revenue
- Purposely underpaying taxes
- Hiding interest
The above list is very similar to the list of fraud criteria, the difference can often be subtle and lie in the harm caused or other criminal elements such as workers compensation fraud resulting in insurance fraud charges. When examining tax evasion cases, IRS views financial circumstances and financial history for suspicious activity or a history of attempts to evade taxes.
If the tax evasion activity is found to be deliberate, it is considered a criminal offense and punishable under federal law. The guilty party can be fined up to a quarter of a million dollars. An individual can be fined up to half of a million dollars for a business. They can also face up to five years of imprisonment.
Negligence is a third form of underpaying taxes. The key difference between tax evasion and negligence charges lies in intent. In the case of negligence, elements can include insufficient payment in taxes due to miscalculations or unintentional errors when submitting tax forms. In order to receive this result, you must prove that omissions were done purely out of error.
Although negligence determination is better than one of fraud or evasion, there is still the possibility of being fined up to 20% of the underpayment.
Again, the biggest factor between tax fraud, tax evasion, and negligence is intent. Purposeful manipulation and concealing of income to avoid taxes is a punishable offense by the IRS.
If you find yourself under audit by IRS, consult with our team of experts at Milikowsky Tax Law. Our team of attorneys are equipped to review your specific case and formulate a defense strategy specific to you.
Anytime you file taxes, there is a chance that your tax return might be audited by the Internal Revenue Service (IRS). The agency conducts standard procedures to find any errors or discrepancies among taxpayers. The audit process is meticulous and, should you find yourself under the scrutiny of IRS, will require detailed information from you.
In the article below, you’ll learn about the audit process and frequently asked questions surrounding IRS audits.
Why was I selected for an Audit?
There are different reasons you may be flagged for IRS audits. Some are due to random checks; however, you have a low chance of being audited this way. Most taxpayers have less than a 0.6% chance of receiving a random audit check.
IRS runs tax returns through their Discriminant Information Function (DIF) system to continually update their database and make sure they are tracking industry benchmarks for each industry and tax bracket.
The DIF system also checks for incorrect tax filing information. Any discrepancies in tax forms, such as an imbalance of tax returns, a discrepancy between reported earnings and employer filings, or unreported cash transactions by one member of a transactional party, will trigger DIF to send your return to an IRS audit officer.
People are more susceptible to an audit if they:
- Earn less than $25,000 or more than $500,000
- File incorrect or incomplete returns
- Have large numbers of cash transactions
- Claim a disproportionate number of deductions
- Are self-employed
- Have a home-based business
- Have a cash business
- Have foreign assets
Sometimes you can be audited as a result of your business partners or investors going through an audit.
How Will I Know If I am Selected for an Audit?
You will know if you are selected for an audit if you receive a verified letter in the mail from IRS. They do not call to notify you about your audit.
What Do I Do If I’m selected for an Audit?
If you or your business are selected for an audit, make sure you read all of the information sent to you in your audit notification letter. The letter and accompanying information request packet will notify you as to what entity is being audited (business or personal) what year(s) are under review and who your auditor is. Once you know what IRS needs, make sure you collect all of the records and supporting documentation requested (but nothing additional). You will need to submit records from banks, vendors, and businesses you have worked with, invoices and pay stubs, payroll records, and medical expenses among other information.
Should I Hire an IRS Tax Attorney to Help Me?
We suggest contacting a qualified tax attorney to help guide you through your audit, to ensure you are timely, responsive, compliant, and do not unintentionally increase the scope of your audit to other areas of your business or personal finances that would otherwise remain unscrutinized.. There is little to no margin for error during an audit, a tight timetable, and potentially severe consequences to a poorly handled interaction with IRS. Unlike CPAs who do not have attorney-client privilege, attorneys are able to speak with your IRS officer on your behalf without risk of subpoena or summons of records discussed. A qualified attorney can, review your documents with an expert eye, create the right strategy for you, represent you or your business, and provide valuable advice and guidance.
How long do I have to reply to an IRS audit?
You have 30 days to reply to the initial audit letter. Do not hesitate, and make sure you take the appropriate steps early on. IRS is not likely to provide extensions unless you have a good reason. Your attorney can help by advocating for more time with the IRS agent. A good attorney will know many of your local IRS auditors and have strong relationships built on well-structured prior cases and mutual respect.
How Long Do Audits Take?
The time it takes to conduct an audit depends on the case. It fluctuates depending on:
- The seriousness of the tax reporting error
- When and whether the right information is provided to IRS
- Communication between the person being audited and IRS officer
How Many Years of Tax Returns Can IRS audit?
IRS audits tax returns from the past three years; however, most are from the past two years. Only when IRS agents find discrepancies within the audit they are conducting do they dig for information older than three years. Most audits do not look for information past six years. Though in cases of criminal audits IRS can look back 9 years and longer.
If you or someone you know received an audit letter from IRS, reach out to our expert team at Milikowsky Tax Law. We have over a decade of experience working with IRS and tax audits and are experts in defending business owners in the face of IRS or other government agency audits.
In mid-May, the U.S Treasury Department announced that they would require any transfer of $10,000 or more to be reported to the Internal Revenue Service (IRS). This update comes in response to growing concerns with regard to cryptocurrency compliance.
While many forms of crypto trading were designed to be hidden or virtually invisible, IRS is far from blind to these transactions. It is suspected that a significant amount of money is laundered through crypto transactions and tax evasion occurs through illegal crypto investing and trading.
IRS’s initial response to the rise in the use of cryptocurrencies includes training and developing their internal investigative teams to utilize data analytics to trace, identify, and audit suspicious crypto transactions.
This recent shift in focus towards cryptocurrency violations brings up questions of, “why now?” given that IRS has been defunded and has experienced years of employment shortages, and is currently in a stage of increased recruitment efforts. Data analytics is hardly a new venture for IRS, it has long been a staple in tracing and audits. While the blockchain is opaque and there will be elevated challenges around information-gathering, the use of data analytics is the IRS’ best path forward in combating crypto-fraud.
IRS’s decision to increase its utilization of data analytics tactics comes as an approach to sift through billions of transactions with greater efficiency and ease than they have in the past. This is an ideal response given the previously mentioned employment shortages currently being experienced by IRS.
Cryptocurrency continues to grow at an exponential rate. IRS has experienced challenges in keeping up with how quickly the unique industry has grown and evolved over recent years. The implementation of data analytics is a step towards being able to keep up with digital currency, in a way that they have not been able to previously.
As IRS adjusts to these new processes for tracing and auditing cryptocurrency exchanges, it is predicted that they will be able to increase their success in regulating and addressing the potential of tax evasion.
Jeffrey Cooper, former executive director of international operations at IRS Criminal Investigation told Accounting Today that it’s a process of ‘follow the money.’ He explained that once money goes into the exchange, they’re able to trace it through data analytics.
The American Family Plan, put in place by the Biden administration, also helps deal with potential tax compliance issues with cryptocurrency by implementing a new reporting threshold of $10,000. The new reporting requirements will ensure that whatever crypto traders are doing, there will be a clear trail of traceable data to accompany it.
According to IRS estimates, in 2019 there was a discrepancy of over $600 billion between taxes owed and taxes collected by the agency.
Changes in the process of implementation are likely to induce upset among crypto investors. That being said, politicians across the board have prioritized crypto regulation among concerns of market manipulation and uninformed retail investments.
For business owners who have thought that crypto is a way to avoid (or evade) tax liability, to move money undetected, or otherwise skirt regulations, the recent rise in interest by IRS and other government entities in regulating the industry should come as a warning. There are two things that we all can’t avoid…. And one of them is taxes.
In early May of this year, the Biden Administration officially made the decision to revoke the previously adjusted Trump era ruling on independent contractor classification.
Earlier this year, in January 2021, the Trump administration took advantage of the opportunity to implement final changes to the Department of Labor (DOL) before leaving office. The “final rule” that they implemented stood largely unchanged from the original ruling which established a tiered test to determine employee versus contractor status as part of the Fair Labor and Standards Act (FLSA).
The updated proposal established a two-part analysis to determine whether a worker’s correct status is that of an independent contractor or employee. The “core factors” stated are as follows:
- The nature and degree of control over the work.
- The worker’s opportunity for profit or loss based on initiative and/or investment.
In addition to the previously mentioned “core factors,” the DOL also listed three other factors to support the analysis. These factors are:
- The amount of skill required for the work.
- The degree of permanence of the working relationship between the worker and the potential employer.
- Whether the work is part of an integrated unit of production.
Following the ending of Trump’s presidency, the DOL has announced that the ruling determined by the Trump administration was inconsistent with FLSA and was thought to have a negative impact on both workers and businesses.
As such, the previously implemented “final rule” was rescinded under the current Biden Administration.
Going forward, companies will be responsible for judging their workers based on the existing “economic reality” test until another proposal can be made by the Biden administration.
It should be noted that throughout President Biden’s campaigns, he spoke of his intentions to promote a federal standard for independent contractor classification in alignment with the existing method utilized in California.
This method includes the use of the multifactor “ABC” test. Under the ABC test a worker is classified as an employee unless they meet all three of the following criteria:
- The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- The person performs work that is outside the usual course of the hiring entity’s business.
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Until further decisions are made, this test will remain the federal determination with regard to independent contractor classification.
For more information or guidance on the proper status of your business’s workers, call or contact our team of tax professionals at Milikosowsky Tax Law.
Over the past year businesses flocked to the Small Business Administration (SBA) to submit applications to receive their share of the federally allocated Paycheck Protection Program funding.
PPP loans were distributed to businesses struck hard by the ongoing coronavirus pandemic. Their intended use was to help keep workers employed by providing funding to support their ongoing paychecks following mass layoffs at the forefront of the pandemic.
Since their initial rollout, it has been discovered that many businesses wrongly claimed PPP loans, resulting in millions of dollars of fraudulent claims.
As of May 31, SBA has since closed the application for PPP loans. Despite being renewed by the federal government numerous times in both 2020 and 2021, businesses are no longer able to submit new requests for funding.
As of May 23, SBA had approved over 11.6 million loans, totaling approximately $796 billion.
Even since the program application portal has been shut down, SBA will take approximately one month to process all existing applications submitted prior to the closure.
While the initial rollout of the PPP loan distribution process brought with it thousands of fraudulent claims, it’s now expected that the program overall served as a starting point for SBA to continue serving small businesses into the future.
While the general PPP loan applications have been closed at this time, SBA has been granted an additional $100 million to fund a pilot program providing support to underserved small businesses. This comes after speculation that despite the hundreds of billions of dollars in loans distributed over the past year, some of the neediest businesses were not able to receive the support they desperately needed.
Additionally, Congress has recently granted SBA the responsibility to take charge of new relief programs for businesses in the restaurant and live-events industries, two industries that are returning to their former glory.
The discovery of such a large number of fraudulent PPP claims has left all recipients at risk of an audit. While all loans disbursed of $2 million or more are guaranteed to be audited by SBA, all recipients, regardless of loan size are at risk of a potential audit.
While SBA is auditing a large number of loans that were dispersed as part of the Paycheck Protection Program, those that are found to have been spent as they were intended have the opportunity to be forgiven entirely.
If your business received a PPP loan and is confident that you utilized your funding for its intended purposes, there may not be a significant reason to be concerned in the event of an audit. However, in the event that you are the subject of an SBA audit, it’s imperative that you maintain ample records and documentation of all expenditures related to your receipt of a PPP loan.
Another aspect of SBA audits to be concerned about is SBA’s relationship with other government agencies including EDD and IRS. In the event that your business is audited as a recipient of a PPP loan, there is the potential that SBA may uncover information in their audit that may lead them to involve additional government agencies to conduct further audits of your business.
EDD and IRS audits hold significantly more complex potential outcomes and should not be considered lightly. While your business may not have otherwise triggered an IRS or EDD audit, SBA has the simple ability to pinpoint businesses for them to investigate further.
If your business is the subject of an SBA, EDD, or IRS audit, the best practice is to reach out to an experienced tax attorney immediately. Making the wrong choices in the event of an audit has the potential to further incriminate you without your intention of doing so. An experienced tax attorney such as those on our team at Milikowsky Tax Law can support you through the complicated process of an audit and do our best to support the best possible outcome for you and your business.
To get started working with our team, call or contact us today. At Milikowsky Tax Law, we keep businesses in business.
While nobody wants to be responsible for paying any more taxes than is absolutely necessary, it’s critical to remain aware of the fine line between getting creative with your tax responsibilities in a legal way, and taking it too far into tax evasion or avoidance. The latter should be avoided if you don’t want to land yourself as the subject of a government audit, or even in prison.
In 2019, IRS declared a tax gap of $441 billion, representing the difference between the amount of taxes that should have been collected, and how much was collected.
Despite this significant total of uncollected taxes, the same year, IRS audited only 0.4% of individual taxpayers in 2019, and only 6.2% of corporations.
While there are certain behaviors and triggers that may result in IRS auditing your business, it is clear that they are incapable of fully keeping up with the full amount of audits needed to regulate all taxpayers.
What is tax evasion?
Tax evasion is defined as “the use of illegal means to avoid paying taxes.” Some examples of actions that may be labeled as tax evasion include the following:
- Purposely underpaying your taxes
- Underreporting your annual income
- Claiming false deductions
- Hiding interest
- Falsifying records
What’s the difference between tax evasion and tax avoidance?
While tax evasion is an illegal practice, tax avoidance is the act of legal strategic tax planning. While the actions listed above are unlawful and enlist deceitful and dishonest tactics to avoid paying the funds for which they were responsible, tax avoidance involves simply reworking their options to minimize the total amount that they are responsible for paying.
Some examples may include the use of tax-advantaged savings accounts (such as those for retirement or educational purposes), contributing to charitable organizations, or avoiding realized capital gains.
The point in which tax avoidance transitions to tax evasion is a gray area. Oftentimes the average taxpayer may not be equipped to determine at what point this line is crossed. As such, the best practice is to consult with a tax attorney or tax law professional to ensure that your actions do not lead to potential consequences including those mentioned below.
Potentially penalties for tax evasion
Tax evasion is a criminal offense and has the potential to lead to jail time.
The average jail time for tax evasion ranges between three to five years. It varies on a case-by-case basis, but jail time for tax evasion occurs more often than one would think. What other penalties exist for tax evasion?
According to Internal Revenue Code, “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”
Needless to say, IRS takes tax evasion seriously. With a 90.4% conviction rate on criminal cases, going up against the IRS criminal investigations department is not to be taken lightly.
You may be able to show that there was no intent to defraud the government if you are able to prove that there was a legitimate miscalculation of taxes. With proper guidance, it is possible to partake in tax resolution negotiations with IRS or state tax authorities. It is always advised that you receive counseling from an experienced tax attorney who can help in creating a defensive strategy to bolster your case.
The attorneys at Milikowsky Tax Law have extensive experience in dealing with tax evasion charges. Contact us today with further questions or to discuss your case.
In March 2021, the current administration and congress were able to enact the American Rescue Plan, the plan provides cash payments to individuals and included tax law changes benefitting lower-income individuals and families. The American Rescue Plan tax changes are temporary (expiring at the end of 2021) remedies targeted at those affected by the economic downturn caused by COVID-19.
- A child tax credit of $3,600 per child under age 6 and $3,000 per child ages 6 through 17 is fully refundable and payable in advance. It will revert for 2022 to $2,000 per child under age 17 unless extended by legislation.
- A child and dependent care tax credit maximum credit for one individual is $4,000 and $8,000 for two or more qualifying individuals and is refundable for some taxpayers.
- EITC extended to workers under age 25; and for 2021, individuals as young as age 19 are eligible.
- Premium reductions for ACA coverage for two years.
On the docket for enactment are other tax implication-filled plans such as The American Jobs Plan aims to achieve the following:
- Create new unionized jobs and train American workers for future jobs
- Invest in innovation by revitalizing American manufacturing
- Create caregiving jobs and raise wages of home caregivers
- Modernize homes, commercial buildings, schools, and federal buildings
- Upgrade highways and national infrastructure
- Update drinking water infrastructure and develop a new electrical grid
These intended projects are planned to be funded by the Made in America Tax Plan that the presidential administration has also proposed. Currently, this tax plan is projected to bring in a total of approximately $2 trillion to cover the costs of the projects mentioned above.
The intention of this proposed legislation is to ensure that large corporations and wealthy individuals will pay a higher rate to contribute to the national funding. As currently proposed, this plan will be funded over the coming 15 years, particularly concentrated over the next eight years.
The details of this proposed plan will implement substantial changes for many corporations across America. Additional details of the Made in America Tax Plan are:
- Increased Corporate Tax Rate
The Made in America Tax Plan proposed an increased corporate tax rate to 28%. These rates were previously cut down to 21% in 2017 as part of the Tax Cuts and Jobs Act enacted that year. Note that these proposed rates are still lower than the rates experienced prior to their lowering in 2017.
- Minimum Book Tax
President Biden’s proposed updates also include the implementation of a 15% minimum book tax on firms with $100 million or more in net income. Overall, this change is targeted at corporations that have significant annual income but pay little to no taxes.
- Clean Energy Incentives
President Biden’s plan mentioned both tax and non-tax incentives with relation to clean energy. While the details surrounding this aspect of his plan are still not entirely clear, it was noted that existing subsidies would be eliminated and not be expected to cause significant impacts on the price or security of energy for Americans.
It is also mentioned that Biden’s tax plan would advance existing clean energy production by extending existing production and investment tax credits for the next 10 years.
- Increased IRS Enforcement
Lastly, President Biden’s proposed plan calls for a significant strengthening of IRS enforcement. He aims to reach this goal by increasing funding to IRS to increase audits of international corporations that are not meeting their tax contributions.
In more recent news, Biden has claimed he expects that increasing IRS enforcement will bring in an additional $700 billion over the next decade. This result is expected should the administration obtain the $80 million budget from Congress.
While the administration’s proposed plans are just that, proposed, it should be noted what intended actions might mean for businesses in the near future. The likelihood that these plans will see further edits and adjustments from Congress before being approved is high.