Taxes are a complex thing in California. You must have a great hold on your finances throughout the year for your tax season to go smoothly. If you make an error, you attract an audit from the IRS. In most audits, the officers are only interested in collecting the taxes you owe.
If the IRS suspects that you may have committed tax fraud, they may impose a penalty. In some cases, they may even ask a specialist to look into your case and transfer it to the IRS Criminal Investigation unit. This is why you should be aware of the laws in your state.
To avoid accidentally engaging in something illegal, it is good to have professionals like a CPA in Oakland, CA, on your team. They are well-versed with ever-changing laws and can help you prevent errors.
Understanding the difference between tax fraud and negligence
So, how does the IRS differentiate between a genuine mistake and an intentional fraud? The difference is in the intent only.
If you were simply negligent or unaware of the laws, you could still have to pay a fine. However, the Internal Revenue Service (IRS) will not hold you criminally liable. On the other hand, you could face much tougher penalties if you are found guilty.
Fortunately, the IRS understands that understanding federal law is difficult since it is complex. It rarely happens that a simple mistake has led one to the prison. However, it is still recommended to work with an expert so you do not have to pay the hefty fines.
Beware of these common tax mistakes that look like tax fraud.
Not all kinds of errors in your tax filing count as tax fraud. However, you must be careful. Here are some of the most common mistakes made by new business owners or individuals filing for taxes for the first time:
- Underreporting income
One of the most common types of tax fraud done by businesses is underreporting income. This happens when you intentionally falsify information on your income tax return to reduce your tax liability. You must report income from all streams. Many business owners leave some things out by mistake, which causes them to face penalties later.
To avoid this particular error, you can work with a professional tax preparer.
- Misclassifying employees as independent contractors
Misclassification of employees occurs when business owners classify their permanent employees as independent contractors. They do so to avoid paying payroll taxes, comply with wage and hour laws, minimum wage, or overtime and can get out of providing meal periods or rest breaks. Needless to say, all of this is illegal.
Additionally, employers also do this to get out of paying for their employees’ workers’ compensation insurance. Make sure to classify employees properly and double-check before submitting your tax returns.
- Improper expense deductions
Federal laws allow businesses to claim a number of deductions on their taxes. Some of these deductions can drastically reduce your tax liability. Some may even call this a “Steal Deal.” This is known as tax avoidance, and it is completely legal and beneficial for businesses.
However, some businesses may lie about these deductions to avoid paying the full amount. They manipulate the tax system by misrepresenting their company’s financial circumstances.
It is highly recommended that you avoid doing this. If you get caught, you cannot simply resolve the issue by paying the amount you owe. You will have to prove that you did not act with intent and that it was a genuine mistake. You could face potential criminal consequences.
Protect your business today!
Taxes are complex, but you do not have to navigate them alone. Work with a knowledgeable CPA in California to avoid the pitfalls of being negligent and ensure that you are compliant with the ever-changing laws and regulations. Keep your business safe from severe penalties today!
