Small businesses may be falling behind in tax compliance

I noticed four trends among small business owners this past tax season:

  1. Asking for professional help too late. Clients ask for help or advice with taxes after year end but they have not maintained the appropriate bookkeeping records and compliance filings throughout the year. I found, for example, that plenty that did not track or prepare required forms for payments made to their vendors. Most have not maintained the type of records that would support the deductions taken on their tax return in an audit (see #2 below). There is little or no effort to plan to minimize taxes until it is too late to make any real difference. I could have been helped with any of these issues earlier but it would have taken some advance planning and, of course, if I am expected to handle it we would need to have a business agreement for me to do so. Instead, I find that small business clients just ignore bookkeeping and compliance and expect to resolve these at once at the accountant’s busiest time of the year. I did my best with limited information but I fear that poor outcomes are likely to follow for some of them. There is no doubt that far more of these types of small business owners are being penalized with audits and penalties.
  2. Frustration with audits. IRS publishes statistics saying that audit rates have declined and this sends a confusing message to small business owners. The message is misleading because it does not reflect the overall number of demand letters being generated for these taxpayers. The reality is that there are more opportunities to trip up on compliance through automated tax compliance programs being used by government today. The fact is that any one of these tax compliance measures at federal, state or local tax level is as frustrating as a traditional audit. Tax collectors have become far more sophisticated in these aspects. Small business operators have not matched this increase in tax compliance sophistication. Small business owners express surprise and dismay that they have been “targeted” for audit. They don’t recognize that this type of audit was likely and highly predictable. The end result is increased frustration, penalties and higher overall tax compliance expenses.
  3. Taking a short-sighted approach to accounting. I conclude that it is almost impossible to navigate the maze of today’s tax compliance measures without spending money. Small businesses naturally wish to avoid spending money; thus the problem. A small business person with inadequate budget for accounting and compliance is destined to run into trouble over the longer term. As an accountant, I need to recognize these situations in advance to avoid stepping into the middle of a problem later. It is impossible to reach the level of business stability result without taking accounting and tax responsibilities seriously. I’ve recently started talking about a $150/month as the minimum for even the smallest businesses establishing an accounting and compliance budget. While this may be an oversimplification, at least it sets a benchmark to help open a conversation.
  4. Overreliance on automated technology that lacks oversight and judgement. Self-serve platforms are great for saving time and money but too often lead to poor outcomes because they omit the ingredient of experienced human or professional judgement. The meme of self-serve online financial management may well turn out to be a mirage. The tax preparation software Turbo-tax is the most visible example. The wildly popular software makes it very easy to make tax compliance errors that would have been caught by a human tax adviser. Tax collectors know about these common errors. Last year one state reportedly audited every taxpayer who took certain types of deductions stemming from data entered into tax software programs. Many moved to this self-serve platform thinking that is would save time and money in comparison to traditional tax preparation services but later find that they need to return to correct problems. It turns out that the maker of the Turbo-tax software is working to match these automated service with personal professional services. But many technology users don’t see the danger until too late.

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