The US tax system runs on the concept of voluntary compliance. You volunteer to pay your taxes in full and on time, and Uncle Sam won’t come and make you.
Maybe it isn’t that traumatic, but each taxpayer is expected to file an "honest and accurate return autonomously," meaning without government intervention. Compliance doesn’t refer to the filing itself but the idea that the taxpayer will file properly.
By complying with the tax laws, you or your business have made a conscious decision to comply with federal, state, and international tax laws so you can maintain your pristine reputation in the eyes of the IRS.
Usually, compliance is only as complex as keeping up with tax changes every year. Still, things get complicated if you move from one locale to another, especially between states or out of the country. In all cases, compliance means keeping all the records and paying all the taxes you are supposed to pay in all jurisdictions where you are taxed.
Here’s a close look at tax compliance.
Primary Tax Components for Businesses
If you own a business, you must file taxes for said business. Various taxing authorities typically have the same requirements for businesses.
Your business should have an Employer Identification Number (EIN), which functions like an individual’s federal tax identification number. Obtaining an EIN is one of the first steps a business takes after registration. The EIN ensures you can comply with your business tax responsibilities.
Businesses, like individuals, must pay income tax. They pay income tax to the IRS and state governments. In some cases, they pay local income tax, too, on any income earned during the year. Your business structure determines which tax laws apply when you file your income tax paperwork, which includes your profit and loss reporting requirements.
You maintain compliance by paying estimated quarterly taxes or filing and paying annual taxes.
Businesses (including sole proprietors or the self-employed) can pay estimated quarterly taxes to reduce the total tax liability on Tax Day. Quarterly estimated taxes are not always required, but if you decide to pay them, stick with the schedule. Changing how you pay your taxes throughout the year can create problems.
Estimated taxes are income tax that is not subject to withholding:
- Income tax
- Self-employment tax
If you begin to pay estimated taxes, keep it up, or you will be out of compliance.
Businesses can receive tax deductions for charitable donations, including deducting expenses related to travel and materials from a volunteer project. You won’t be considered non-compliant for not reporting it. Still, you also won't benefit from the deduction if you don't.
IRS FSLET Compliance Program (Employment Taxes)
The FSLET is the Federal State Local Employment Tax program run by the IRS. It includes a set of compliance checks and examinations to determine if you are following all the rules.
A compliance check is a smaller burden than an examination. Compliance checks include:
- A review of filed information and tax returns of your company
- Verification of record-keeping and tax return filing
It is not the same as an audit and does not determine tax liability. A compliance check does not include an inspection of your books and records. All the IRS is interested in seeing is whether you have maintained your files of forms required by the taxing agency and whether you understand all the filing requirements for those forms.
Compliance checks are an opportunity for the IRS to educate you and encourage you to comply with employment tax law and filing requirements. Most of the time, everything is taken care of within a contact or two.
The IRS can make a compliance check whenever it thinks it’s warranted. You can refuse to participate in a compliance check without penalty. The IRS always has the option of opening a formal investigation or audit.
Compliance Requires Accuracy and Precision
Deadlines are a big thing with the IRS and most other taxing authorities. Depending on where the money comes from, you can have multiple due dates for various kinds of taxes, especially taxes withheld from employee paychecks. It’s critical to understand the deadlines for every tax you pay so you can maintain compliance.
The annual filing date is everyone’s favorite day, Tax Day, usually April 15 each year. Many businesses request extensions. If you need one, be sure to file on time and include the correct paperwork to ask for one. If you miss the deadline or leave out forms, you are non-compliant and will pay substantial fines.
Your payments must be accurate. Underpayment makes you subject to significant penalties and interest on the unpaid balance. To recover the balance, the IRS can garnish wages, levy bank accounts, and place liens on company-owned property. If the IRS thinks you underpaid deliberately, you could be criminally prosecuted.
Documents and record-keeping are your friends in the compliance game. Be diligent in collecting documents from your contractors and new employees and maintain accurate records so you can give the IRS the correct information.
Correct documentation is essential if the IRS or other taxing authority audits your business. They use documents and records to determine whether an error is deliberate or intentional.
Factors In Compliance Enforcement
If the IRS or other taxing authority identifies non-compliance for prior tax years, they consider several factors.
- How much time and effort does it take to determine the taxes due?
- Does this business have a prior history of non-compliance?
- Does this entity receive income from illegal sources?
- What is the entity’s anticipated revenue?
- Is the tax collectible?
Taxing authorities, including the IRS, consider special circumstances for any taxpayer, class of taxpayer, industry, and the peculiarities of the tax class involved.
In most cases, taxing entities enforce delinquency back six years unless they receive prior management approval to dig back further.
Do You Need Compliance Assistance?
We know better than most people how complicated taxes can be. If you have started a business or have any questions about maintaining compliance, please contact Top Tax Defenders. We are happy to dig into the weeds to help you get settled with the IRS.