Owning a business comes with many rewards as well as many responsibilities. Come April and one of these responsibilities include filing an annual income tax return. This non-revenue generating administrative aspect of your business might be mundane, but there are major legal and financial consequences if you neglect to file your taxes. Failure to file taxes or even underreporting your business income to the IRS has serious repercussions, such as fines, penalties, and even jail time. Ignore this aspect of your business and you might not have a business anymore.

The American tax system is complicated, and owning a business puts another layer of tax complication to an already convoluted system. However, tax season doesn’t have to be difficult and there are distinct differences between failing to file your taxes and intentionally concealing your company’s assets. Read on to learn more about the differences and the impact it will have on your business.

Who must report business income?

All businesses are required to file an annual income tax or information return. An information return is a mandatory form that businesses, specifically partnerships, use to notify government agencies and the IRS about the taxpayer and company. This return reports all transactions made by the business during the calendar year such as annual income, gains, losses, and deductions and credits that determine the income tax liability of the corporation.

Income tax is only one of many different types of IRS forms and which form you need to complete is dependent on your business structure. Other tax forms include but are not limited to self-employment tax, estimated tax, and excise tax. Refer to your business structure or operational agreement to understand how you should report your business. In general, everyone who owns a business must report their income in some form or another, and which IRS form you file will depend on your business structure.

Failure to report your business has dire consequences 

Making an innocent mistake on your tax return doesn’t automatically criminalize you. Mistakes happen and the government won’t punish you for this. However, if you did intend to evade taxes, it goes without saying that you’ll be faced with severe penalties and repercussions. Purposefully concealing assets, income or information to dodge liability typically constitutes as tax evasion.

According to the IRS, if you intentionally failed to report your income or were dishonest with your reporting, you might be faced with the following consequences:

• A felony on your record
• Five years in jail and/or a fine up to $250,000 or $500,000 for corporations
• A possibility of several civil penalties such as failure-to-file penalties, underpayment penalties, and accuracy-related penalties
• The likelihood of getting audited more frequently

What’s the difference between tax evasion and tax avoidance?

There is a distinct difference between forgetting to file your business tax and intentionally concealing your information from tax authorities. Tax avoidance and tax evasion are two very different things with very different consequences, and the main determining factor is innocence versus intent. Intentionally lying and hiding on your taxes falls under the tax evasion category.

Tax evasion is the use of illegal methods to conceal income or information from the IRS or other tax authorities. Like we discussed above, tax evasion can result in severe fines, penalties, and/or prison time. Some examples of tax evasion include not reporting income from an all-cash business or illegal activity such as drug dealing or prostitution. Many tax evasion cases involve individuals who pocket the money from their cash businesses and fail to report it. Other cases involve people who ignore to report their overseas income, and the list of different tax evasion tactics don’t end there.

In contrast, tax avoidance is the use of legal methods in order to reduce taxable income or tax owed. Claiming allowed tax credits or tax deductions are common tactics to reduce your taxable income. For example, claiming business expenses to reduce your taxable income is completely legal and the IRS won’t penalize you for this. Another way to reduce your tax bill legally is by making charitable donations through your business.

When you need to hire a defense attorney we’re here to help

We’ve discussed how to report your business income, what happens when you intentionally under-report your income or forgo this process entirely, and the difference between tax evasion and tax avoidance.

If your company mistakenly neglects to file taxes or accidentally reports inaccurate income, you may be audited and asked to amend your tax return. However, if you’ve failed to report your business income and the IRS has convicted you of tax evasion, your best option is to hire a defense attorney that can represent you and protect your rights.

At the Law Offices of Robert J. DeGroot, we’ve had years of experience and success protecting individuals and their rights. Talk to our effective and professional attorneys today for your confidential consultation!