Fixing Tax Mistakes: 3 Common Problems and How to Solve Them

Getting audited is every taxpayer’s worst nightmare. Fortunately, most people don’t get audited. However, there are a host of other tax problems that the self-employed and small businesses do encounter. Here are three common tax errors and how to solve them.

Missing Tax Deadlines

Most consumers think of April 15 as the tax filing deadline. And to be fair, for the typical taxpayer, that’s the most important date.

But business owners often have additional tax deadlines to keep in mind. Depending on the nature of your business, you may have to stay on top of quarterly estimated income tax payment deadlines, your corporate income tax filing deadline, state sales tax filing deadlines, employment tax filings, and possibly others. Missing any of the required deadlines — even by as little as a day — can result in fines. Changes in your filing status can also affect tax deadlines and may require you to submit a Form 1040X to correct errors on previously filed tax forms (more on this in a moment).

To stay on top of all the deadlines, have your accountant give you a list of the deadlines you’ll need to comply with. Then, set your calendar or accounting software to remind you of the due dates far enough ahead so you can gather the records you need to file the forms on time. If you have employees, a payroll service can handle the tax filings and remittance of payments for you so you don’t forget or miss filing dates.

What is an amended tax form?

An amended tax form, known as Form 1040X, is used to correct errors or make changes to a previously filed tax return. If you discover new information after filing your original return, such as additional income or deductions, you can use Form 1040X to update your tax return. The IRS now allows electronic filing of amended returns, making it easier to correct errors and avoid penalties.

To amend your tax return, gather all necessary documents, including your original tax return, and complete Form 1040X. This form requires you to explain the reason for the amendment and provide supporting documentation.

How to Amend a Tax Return

Amending a tax return might seem daunting, but it’s a straightforward process if you follow these steps:

1. Gather all necessary documents, including your original tax return and any supporting documentation.
2. Complete Form 1040X, explaining the reason for the amendment and providing supporting documentation.
3. File the amended return electronically or by mail, depending on your preference.
4. Pay any additional tax due, if applicable.
5. Respond promptly to any IRS notices or letters regarding your amended return.

By following these steps, you can correct errors on your tax return and avoid penalties and interest. Acting in a timely manner is crucial to prevent further action from the IRS.

Not Setting Aside Money to Pay Taxes

When you build a profitable business, it’s natural to want to enjoy some of the profits you’ve worked so hard to earn. But forgetting to calculate the income and any self-employment taxes you’ll owe on those profits can lead to a big, unexpected tax bill when you file your personal tax return. In fact, the tax bill could be so big that you don’t have the cash on hand to pay it.

If this happens to you, don’t panic. The IRS isn’t going to come kick in your door and take away your house because you goofed this one time. But do file the tax return on time, even if you can’t pay.

Here’s why: The IRS not only wants the money it’s owed, but it also wants tax returns filed on time. If you don’t file your return on time, the IRS will charge you a penalty of 5% of the unpaid taxes for each month or part of a month that a tax return is late up to a maximum of 25% of the taxes due. The penalty starts accruing the day after your return is due.

The simple way to avoid that huge fine is to file your tax return on time. Pay as much of the money you owe as you can when you file. The IRS will let you set up a payment plan to remit the rest of the money. The failure-to-pay penalty is 0.5% to 1% of the unpaid taxes, so the more you can pay when you file the return, the lower the penalty will be. It’s a lot like a car payment or mortgage; the more you can pay up front as a down payment, the less you’ll pay overall.

Poor Record Keeping

If you haven’t been good about keeping your business income and expense records organized, you may run into problems at tax time. You might also find that you unintentionally overpay or underpay your estimated taxes throughout the year. A huge refund means you’re giving an interest-free loan to the IRS, when you could have used that money for mid-year improvements. But if you underpay, you’ll find that you have a big debt to the IRS, all due to poor record keeping.

Even if you make the right tax payments, poor record keeping could make it impossible to get your tax return submitted on time (or to get your records to your accountant on time). If this happens, you can avoid that late filing penalty by requesting an automatic tax-filing extension from the IRS. The extension only applies to the filing date; it’s not an extension of the time to pay. So, when you file for an extension, you should estimate and pay the amount of tax you think you will owe to minimize late payment penalties.

To avoid the problem in the future, keep timely and accurate records of your business income and expenses. An easy way to do that is to use ZenBusiness Money Pro to handle invoicing and track income and expenses.

Receiving a Notice from the IRS

To be clear, a notice from the IRS is very different from being audited. It’s easy to panic if you receive a mailed letter from the IRS, but it may be a relatively minor issue. The IRS may have found you made a couple math errors and that you owe them more money. If the amount is minor, the easiest way to handle it is to pay what’s owed. If you disagree with the IRS, however, you can dispute the charge. The best way to do that is to have your accountant handle the matter for you, since they will know what to say and how to respond to the IRS. They also know the ins and outs of your return.

Depending on your situation, contacting the IRS may be a smart first step. A revenue officer can explain things to you, and even provide advice on how to proceed. If you can’t pay the full amount right now, you may be able to work out a payment plan to settle your debt over time. Additionally, you can visit the IRS website to check the status of your notices and find additional resources for resolving issues.

A word of caution: watch out for scammers posing as the IRS. The IRS usually makes initial contact about tax problems by sending a letter through the U.S. Postal Service. The IRS doesn’t send emails or make phone calls asking for credit card information, or special forms of payment such as gift cards.

The Bottom Line

Nobody wants problems with the IRS. However, problems do arise sometimes. When they do happen, talk to your accountant and take care of the problems as quickly as possible.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.