Business Tax Issues

Jim Buttonow, CPA CITP

Updated on: November 4, 2024

Business Unique Issues

Businesses incur more IRS problems than other taxpayers.

Why? Businesses generally have more transactions with the IRS, including filing other returns like payroll and Forms 1099 with the IRS. In particular, the IRS targets many small businesses for compliance enforcement largely due to studies that conclude that small business has the highest degree of noncompliance with the tax laws.

Business taxpayers face many similar IRS problems as individual taxpayers such as late filing, penalties, audits, collection of back taxes, and notices. However, business have these unique issues:

IRS Field Audits

Although individuals are not exempt from IRS field audits, most field audits are conducted on small businesses – that is, sole proprietorships, S corporations, and partnerships. These audits usually involve all aspects of the business and are very comprehensive examinations of the operations and its finances. For closely held businesses, this usually involves an IRS review of the individuals associated with the business.

S Corporation and Partnership Late Filing Penalties

S corporations and partnerships generally do not owe taxes when they file a return. Their earnings are reported directly on the shareholder or partners' returns. However, S corporations and partnerships, unlike individual taxpayers, can incur a late filing penalty even though they do not owe with their return. Generally, S corporation and partnership taxpayers must use first-time abatement or reasonable cause penalty relief provisions to abate these penalties.

Payroll Tax Penalties

A common penalty for employers is missed or late federal tax deposits on payroll taxes. The failure to deposit penalty can add up quickly and missed payments can cascade into almost continuous penalty assessments. Taxpayers can request relief using first-time abatement as well as reasonable cause after careful analysis of the accuracy of IRS penalty calculations.

Unpaid Payroll Tax Issues

The IRS considers late or non-payment of payroll taxes to be a very serious issue. Taxpayers who owe back payroll taxes under $25,000 can generally get into a payment plan without much IRS scrutiny. However, businesses who cannot pay their payroll taxes, owe greater than $25,000, or have continuous late or missed federal tax deposits face local IRS collection enforcement.

Trust Fund Recovery Penalty Issues

When a company owes back payroll taxes, the responsible persons can become personally liable for these unpaid taxes if they are responsible for collecting or paying withheld income and employment taxes, and they willfully fail to collect or pay them. A responsible person can be an officer, employee, director, shareholder, partner, or other person in authority to collect and pay the payroll taxes. Willfulness is broadly defined as anyone who must have been, or should have been, aware of the outstanding taxes and either intentionally disregarded the law or indifferent to their legal requirements. The IRS investigates the business to determine, assess, and collect the trust fund recovery penalty on all responsible persons.

Independent Contractor vs Employee Issues

Determining who is an independent contractor versus an employee can be tricky. If a business misclassifies a worker as an independent contractor, the penalties and back taxes can be severe. Most often these issues arise in an IRS audit or from an employee complaint to the IRS. Independent contractor v employee employment tax audits can also start from benefits disputes with workers (unemployment, health care or pension coverage). The IRS offers several relief options and voluntary settlement programs in this area.

W-2 and 1099 Late-Filing Penalties

Taxpayers with a clean history of filing and paying on time, self-correcting errors, and having isolated incidents of non-compliance always make good penalty relief candiaBusiness taxpayers can incur penalties for not filing correct information returns when they are filed late, report an incorrect or no taxpayer identification number, or use the incorrect format. The penalties range from $50 – $530 per incorrect statement or form. Businesses can also face paying taxes for the person that did not obtain their taxpayer identification number (called backup withholding). dates. The IRS’ purpose in assessing penalties is to deter noncompliance (IRS Policy Statement 20-1). A good history of compliance is consistent with this IRS’ policy.

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