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Overlooked Accounting Issues Business Owners Tend To Make

Despite the advancement in technology and accounting programs, it’s hard to expect anyone running a businesss to not make a few mistakes along the way. Even those with vast and numerous accounting tools and knowledge, will still make some accounting errors. Managing a business’ finances the right way can give the owner financial flexibility, and when done wrong can be a drain on the business operationally.

Most of these accounting mistakes are due to lack of automation, the fault of simple human error, lost receipts, forgotten expenses, rushed transactions or faulty systems. In other words, since we’re not a robot, anyone could make these mistakes, and they frequently do. So, the next time you feel something just doesn’t add up while updating your numbers; it might be that you committed some of the frequently overlooked accounting errors, so read on!

1. Data Entry Errors

There’s often no particular reason why your numbers don’t add up when going through your finances. But, one of the most common mistake people make is when a number didn’t get carried into the next column, when a zero was left out or when numerals were transposed. This can occur when entering numbers after a stressful day or when distractions occur.

2. Errors and Omissions

It can be so hard for a small business doing all the organization and accounting alone, to remember what needs to get recorded in the books and what doesn’t. Many expenses won’t be reported or receipts are misplaced. Errors like these can cause or give an inaccurate view of how the business is doing and the level of cash flow you have or need, and these are just some of the problems it can lead to.

3. Confusing Employees with Contractors

With the advancement of technology and how the workforce is shifting to freelance work, it is more challenging for owners to designate independent contractor from regular employees. For example, you might have two people in your workplace with the same job but different employment benefits and contracts. However, this might put you at risk of possible audits, financial penalties or legal action when you cannot correctly classify a contractor or employee.

4. Not Backing Up Regularly

Forgetting to back up data can pose a serious threat to your business—but the fact still remains that, almost all of us have done that a couple of times. Many are used to the thought of, “I’ll just do it the next time.” This can cost your business when the unexpected things like, such as a computer crash, theft, fire or natural disaster happens. Losing that critical data means it can be impossible to prove records during an audit or do taxes at the end of the year.

5. Forgetting to Cross-Check Records with Bank Accounts

As a business owner, you should routinely check your account balances against what the bank has listed even when you have the most accurate and updated view of cash flow. This might give you the opportunity to identify any missing or hidden financial records. These mistakes and more can be greatly reduced or eliminated by avoiding short cuts and hiring a competent CPA that has your best interests in mind.

What is considered “Tax Evasion”

Tax evasion in a simple form means illegally avoiding paying taxes, reporting inaccurately, or failing to report (failing to report cash income is the most common one among them all). The government (especially in the U.S) imposes strict and severe penalties for tax evasion. All U.S. citizens and companies that operate in the country are required to pay income tax and report their annual income based on their earnings.

The Internal Revenue Service (IRS) is in charge of regulating taxes, prosecuting any person or entity that avoids payment of taxes due, and can assess penalties as well. The IRS has many special agents trained to gather the information needed for detecting tax evasion. They have access to tax returns, right to seize or freeze accounts, the power to issue a summons, and the right to collect all necessary financial information.

The IRS audits some taxpayers each year randomly or when they see unusual activity. If a person with significant assets declares a very small amount of income or someone claims a lot of deductions in proportion to their income, then the IRS might contact them regarding an audit. The IRS can also seize assets, freeze money in check and savings accounts, levy tax liens, and garnish when taxes have been intentionally evaded. The IRS can go as far as seizing and selling any and all properties held by the individual taxpayer at auction if they fail to repay the tax liability.

Everyone that is determined to be involved in evasion of tax liability has the right to meet with the IRS and be heard. Should you find yourself in this situation, it would be wise to engage an experienced CPA or tax attorney.

Tax Evasion Penalties

Some criminal penalties and civil penalties include the following:

Civil penalties:

• You will be charged half of 1% of your tax not paid each month or a fraction thereof as a penalty.
• You will be charged 5% of the unpaid taxes every month or a fraction thereof when you fail to file.
• Information reporting penalties: It might range from $15 to $50 depending on how late the information return is filed.
• Accuracy-related penalty: Due to disregard of rules, or negligence you will be charged 20% for understatement of income tax, or underpayment.
• If you file a return that has an erroneous figure or not categorized as correct tax your penalty for frivolous return is $500.
Criminal penalties:
• Intentionally evading taxes
• Fraudulent and false statements
• Preparing and filing a fraudulent return
• Willful failure to file a return
• Falsely supplying information

Prevention

To avoid being charged with the serious criminal offense of tax avoidance, it is strongly recommended to file your taxes and pay them on time. If you are not familiar with filing requirements and the process, call us today for a free consultation.

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