For small business owners, dealing with taxes can be a confusing and stressful job. It is a necessary one, though, and failure to careful handle tax obligations can have bad consequences for a business.
Individual business income is, according to the IRS, the largest sources of unreported taxes, and accounts for around $125 billion in unreported taxes every year. One of the challenges for the IRS is that most of these taxpayers are sole proprietors whose income it can be difficult to track.
The agency’s primary way of detecting unreported income is to conduct audits. Much of sole proprietors’ income, about 63 percent, is not recorded on any tax information document or forms, and is considered low visibility. The goal for the IRS is to ensure that taxpayers report their business income accurately.
In determining where to focus its efforts, the IRS uses a proprietary algorithm to identify those at high risk of tax noncompliance. An IRS audit can be stressful for a sole proprietor, but studies have shown that tax audits do not actually have impressive long-term effects on compliance.
Experts on the issue say, though, that most business owners do not intend to snub the IRS, but simply don’t keep good enough records and don’t have a solid understanding of the requirements of tax law for sole proprietors. Though audits are rare, sole proprietors need to understand their tax obligations to ensure they remain in compliance with the law and that they are prepare to face scrutiny when an audit is undertaken.
In a future post, we’ll take a look at some of the tax issues sole proprietors need to be aware of and how an experienced business law attorney can help a sole proprietor handle tax matters.