As the final months to make current-year tax moves creep in, it’s the perfect time to illuminate the dark corners of your tax strategy and avoid frightfully scary tax surprises. Ask yourself the following questions to help shore up your audit risks, payroll processes, and other areas.
How Can I Avoid Audit Triggers?
You may have heard that the hallways of the IRS are a zombie wasteland and that the witch hunt—particularly on upper-income individuals, families and businesses—is over. But jumping to those conclusions (and, in turn, becoming lazy with your tax compliance) could be a costly mistake.
Thanks to AI and machine learning, automated triggers are hard at work flagging issues even if the human workforce has dwindled, and, let’s be honest, there’s still tax revenue that needs to be made. In short, audits are still happening. In fact, it’s important to understand that even if your particular return seems pristine, you may be flagged because your profile fits a statistical formula or there’s been an issue with a related taxpayer, like a business partner or investor. In short, some audits may be out of your control.
And because of understaffing, you may find yourself in the nightmare scenario of an audit, only to have the IRS fail to answer your questions or respond to your appeal on time. “What happens when clients try to become compliant?” Sakinah Tillman, Director of the University of the District of Columbia Tax Clinic, asks in an interview with FORTUNE. “Or when people who are willing and able to pay, but they just can’t get someone on the phone?”
What Are the Solutions?
Continue to avoid common audit triggers, such as failing to report all streams of income or over-exploiting tax credits or deductions. Don’t become complacent with internal audits and other methods that may alert you to problems before the IRS gets involved. Respond promptly to letters and communications from the IRS, and involve your CPA from the start to inform your response and explore alternative avenues for reaching the IRS. And if you notice an error yourself, don’t wait for the IRS to find out. Consider amending your return proactively.
What Are the Latest Federal Tax Laws?
It’s essential to evaluate both your business and personal tax strategies at least annually to ensure that you’re not jump‑scared by unexpected tax bills or you let new tax opportunities slip by you undetected.
That’s never been more true than it is right now with President Trump’s One Big Beautiful Tax Bill, which is likely to change your tax strategy in myriad ways. Exactly how is up to you and your tax advisor to uncover. Personal changes in income and losses, property, dependents, inheritance, and more, as well as business changes, can also affect your tax strategies from year to year.
And be sure your tax preparer knows these new tax laws and is, ultimately, trustworthy. The U.S. Justice Department recently made examples of two separate Fort Worth tax preparation groups, one for falsely increasing customers’ refunds and the other for inflating more than $5 million in claims for tax credits.
The IRS offers guidance on how to choose a reputable tax preparer, and we offer additional tips here. At the very least, look for a CPA, licensed tax attorney, or IRS-sanctioned enrolled agent. The IRS regulates these professionals, and you should be able to verify their credentials online.
And understand that you can be held liable for mistakes and errors, even when made by your tax preparer. Furthermore, your tax preparer is not at all responsible when you omit critical information that they need to file accurate returns.
How Serious Are Payroll & Other Business-Related Tax Errors?
For many businesses, scary tax surprises center around a theme: payroll tax compliance. The IRS logs employment taxes as the top issue triggering billions in civil penalties in the U.S. each year.
And the consequences of allowing payroll taxes to fall behind are personal. When a willful failure to pay or a reckless disregard for following IRS rules is detected, business owners and every other person responsible (authorized account signers, certain officers and employees [decision makers], and even payroll department managers as well as payroll providers) can be held personally accountable.
In other areas, too, if business owners fail to maintain adequate separation between personal and business finances—such as mixing bank accounts or neglecting formalities—the IRS may also ignore limited liability protections.
Sometimes the scary tax surprises hit at the worst possible time: during or after the transfer of your business. It’s critically important to plan the sale, merger, or other major ownership change of your business very carefully and, ideally, several years in advance. Failure to do so could result in tens of thousands of dollars in unnecessary taxes added to the transaction.
This time of year may be known for ghosts and ghouls, but scary tax surprises can be equally unsettling. Avoid the nightmare and stay safe out there with the right precautions.
Feel free to contact us with questions.
