Tax season is one of the most arduous periods for small business owners, with dire consequences for those who take the task too lightly. On this episode of The Small Business Show, host Jim Fitzpatrick is joined by tax attorney Alyssa Maloof Whatley, Chief Legal Officer at the Law Offices of Alyssa Maloof Whatley. She is a tax controversy attorney, and thanks to her successful career settling disputes between her clients and the IRS or Georgia Department of Revenue, she has in-depth knowledge of common mistakes entrepreneurs make with they file their returns.
Whatley explains that small business owners often become subject to punitive measures on accident, due to their lack of familiarity with the system. To avoid punishment, citizens have to follow a complex set of rules. Failing to comply with these, intentionally or not, opens the door to more drastic measures, such as property and asset seizures. For example, the government is not allowed to violate a citizen’s right to due process, meaning that entrepreneurs always have the option of taking the matter to court. Unfortunately, when it comes to situations such as audits, since tax enforcement agencies typically send their communications in the mail, many small business owners accidentally toss the letters in the trash. “Your due process…comes in the form of the mail, and you have to actually open the letters…” explains Whatley. Those who throw away these notices also throw away their due process.
Small business owners who file schedule C tax forms are some of the most targeted victims when it comes to audits. This is due to the liberties many filers take when reporting certain areas of their income or expenditures. Whatley notes that operational costs such as fuel expenses are often exaggerated in these reports, and since such items, even when accurately reported, typically have little supporting documentation, the IRS often has the advantage during disputes. Whatley stresses the importance of proper bookkeeping to keeping a company running, as poor data management can lead to trouble with the IRS.
Small business owners also make mistakes on their tax forms by not understanding the data they need to provide. For example, companies are required to report their expenses. Owners who use a credit card for their business needs may make the mistake of simply writing in the sum of their monthly statements. Unfortunately, different types of transactions are taxed differently. Gas and meals need to reported separately, since different rules apply to each. To avoid opening themselves up to investigations and fines, Whatley recommends that owners do thorough research on where different types of data belong on a return. “As technology increases…the more government information that they have and the more data they collect, the more dangerous the IRS actually becomes to us taxpayers, and the more prepared you have to be,” she cautions.
While Certified Practicing Accountants (CPAs) can go a long way in preventing tax filing discrepancies. However, when the IRS selects a business owner for an audit, their best course of action is to contact an attorney, who can offer guidance and negotiate on their behalf. In the absence of a CPA, Whatley encourages entrepreneurs to make record keeping a daily habit. For items which are more difficult to track, such as gas mileage, they can use apps to ensure accuracy and provide a paper trail.