You have seen the commercials where business owners use expensive law firms to get their tax liability to the IRS reduced – upwards of 90%. One, in fact, owed the IRS some $3 million and settled for just over $100,000. Not bad if you find yourself in that situation and can afford to pay the attorneys to take care of this issues for you.
A better way to avoid owing the IRS or having to pay lawyers to get your tax liability reduced is to not put yourself or your business in that situation in the first place.
Thus, the business mentioned above could have saved both that $100,000 and their huge attorney fees.
While I have no direct statistics, I can almost guarantee that for every one business owner that gets his tax liabilities reduces there are nine or more other firms that end up paying the full amount to the IRS (plus additional penalties and fees) as well as covering additional unnecessary legal expenses – most of which puts such a huge burden on the business that the company is force to shut down and the owners end up in bankruptcy court.
But, all of this can be avoided very simply by understand the tax requirements of owning and operating a business or by hiring someone that does. Paying an employee who understands tax requirements and keeps up with the constant changes or hiring an outside firm to handle your day-to-day tax obligations is always much less expensive in the long-term than having the IRS come after you, your business and ultimately your personal assets.
NOTE: It is usually not the amount that is owed to the IRS that hurts the business but all the interest and fees included in the IRS’s lawsuit – sometime more than 1,000% of the original amount owed.
Each year the IRS puts out tax tips for new and existing businesses to help both you and the IRS avoid the costly task of auditing and fining businesses. These will be discussed here as well as a few of our own suggestions:
First, according to the IRS, your type of business entity matters (not just for personal liability protection but for your tax liability as well). In fact; “you must decide what type of business entity you are going to establish (or change your business too). The type of business entity will determine which tax forms you have to file. The most common types of businesses are sole proprietorships, partnerships, corporations and S corporations.”
Know that most LLC’s are considered partnerships in the eyes of the IRS and can be taxed as either a pass-through entity or as corporations.
The key here is that there are different tax rates for each of these. Some, like partnerships and S corporations, pass-through their income and expenses to the business owners, partners, members, etc; who then pay taxes on their individual amounts. If your personal tax rate is lower than what an alternative corporate tax rate would be – then you might be better off filing for or changing your business to one of these forms of organization. Plus, with recent legislation targeting businesses – more tax issues will focus on the standard corporation as opposed to other forms of organization that are seen as smaller business entities.