Running a small business already comes with enough challenges — cash flow, hiring, marketing — but one of the costliest areas of oversight is tax compliance. Underreporting and filing errors can lead to penalties, audits, and even personal liability for owners.
Top Small Business Tax Mistakes
📌 Filing Late or Not Filing at All
One of the most damaging mistakes is failing to file your tax return — even if you can’t pay. Always file your returns on time. If you need more time, file for an extension. Remember — the extension is for filing, not for payment.
📌 Mixing Business and Personal Expenses
This is one of the biggest red flags in an audit. Using a single account for both personal and business transactions makes it nearly impossible to prove which deductions are legitimate. This matters because the IRS may – to name a few examples – disallow deductions and increase taxable income. Therefore, open a separate business bank account and keep business credit cards and receipts distinct.
📘 Reference: Publication 583 — Recordkeeping Requirements
📌 Misclassifying Workers
Many small businesses mistakenly treat employees as contractors to avoid payroll taxes. Use the IRS’s three-factor test (behavioral, financial, relationship) to ensure your works are classified correctly.
📌 Not Paying Quarterly Estimated Taxes (If Applicable)
Estimated taxes must be paid four times per year. In particular, individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments.
📘 Reference: Publication 505 — Estimated Taxes
📌 Poor Record-Keeping
Inadequate documentation can destroy even legitimate deductions. The IRS requires you to substantiate every business expense with receipts, invoices, or logs. Without them, deductions can be denied and income recalculated.
📘 Reference: Publication 583 — Keeping Business Records
📌 Over-Claiming Deductions or Credits
Aggressive or unsubstantiated deductions — especially for meals, travel, or home office — invite audit scrutiny. Deduct only expenses that are ordinary and necessary to your business.
📘 Reference: Guide to business expense
📌 Ignoring Payroll Tax Obligations
Failing to remit withheld payroll taxes is among the most serious tax violations. Unpaid employment taxes are “trust fund” money belonging to employees. The IRS can assess the Trust Fund Recovery Penalty (TFRP) personally against owners, officers, and bookkeepers.
📌 Forgetting to File Information Returns (1099s and W-2s)
Missing or incorrect information returns trigger steep penalties.
Why Legal Representation Matters for Small Businesses?
Small business tax mistakes often start as accounting oversights but can escalate into legal enforcement actions.
A tax attorney can help by:
- Correcting misclassifications, missed filings, or payroll issues.
- Negotiating penalty abatements or Offers in Compromise.
- Representing you before the IRS in audits or collection proceedings.
💡 Advantage: Once represented, the IRS must communicate only through your lawyer (via Form 2848), shielding you from direct questioning or premature admissions.
📘 References: Form 2848 — Power of Attorney and Declaration of Representative
Need help with a similar issue? Contact our firm today for a consultation.
Small business tax mistakes are not inevitable — they’re preventable with proactive compliance, consistent documentation, and professional oversight. If you’ve discovered errors or received a notice from the IRS, don’t wait. Early intervention can prevent penalties, liens, or personal liability.
Contact Pelham PLLC today for a confidential consultation with a tax attorney experienced in small business tax defense. We help businesses correct errors, negotiate penalties, and restore full compliance.
FAQs
Can the IRS seize business assets for unpaid taxes?
Yes. After a Notice of Federal Tax Lien and Final Notice of Intent to Levy, the IRS can garnish accounts or seize property.
Do I need a tax attorney?
A tax attorney handles legal defense, negotiations, and IRS disputes.
